NR7, also known as Narrow Range 7, is a concept introduced by hedge fund manager Toby Crabel in his book “Day Trading with Short Term Price Patterns and Opening Range Breakouts”. It refers to a situation where the daily range of a stock is the narrowest compared to the previous 6 days. According to Crabel’s theory, when the range of an asset narrows significantly, there is a high probability of a range expansion in the following days.
Below is an example of a NR7 day. The range of the last bar is the narrowest range in the last 7 days.
To test this theory, the data was collected from 2010 to 2021 for S&P 500, Crude Oil, Gold, and Japanese Yen futures. I compared the average range of the day after a NR7 day to see if there were any evidence of range contraction/expansion. Here are the results:
The results showed that a NR7 day occurred approximately 14% to 15% of the time and the average range of the following day was 46% to 72% larger than a NR7 day’s range. This range expansion was observed to occur over 80% of the time.
Based on these findings, traders can look to take advantage of the range expansion tendency on the day after a NR7 day. A simple strategy could be to aggressively trade breakouts and avoid fading or mean reversion strategies on such days. Additionally, one could consider only buying when price is above a 100-day moving average, to ensure that they are only trading when the market is trending up.
Now, let’s try to create a strategy together. We will use the range expansion tendency in a NR7 day for this strategy. The logic for our strategy is simple. We will buy the breakout above a NR7 day’s high and exit at the end of the day. Additionally, we will only buy when price is above a 100-day moving average. This will ensure that we only trade when the market is trending up.
Below are the backtesting results for the S&P 500 & Rusell 2000:
The backtesting results for S&P 500 and Russell 2000 showed a steadily trending equity curve with not many trades but also no big drawdowns. The number of trades seemed to be around 50% of the total number of NR7 days.
In conclusion, NR7 offers traders a powerful tool for understanding range contraction and expansion in the stock market. By using this information in combination with a bullish bias, traders can make informed decisions and potentially increase their chances of success.
Disclaimer: I am not a financial advisor. All information in this blog is for educational purposes only.