The Power of NR7: A Study of Range Contraction and Expansion

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. 

Author: Magnus

Hi there! My name is Magnus. I am a quantitative and discretionary trader meaning that I use both technical analysis in combined with ideas that backed by data. I’ve been trading stocks for over 5 years with many successes and failures. Originally, I started out as a day trader, but switched to a swing trader. Nowadays, I do a combination of both. Outside of trading, I am a Business Systems Analyst for a S&P 500 company. In this blog, I’d like to share quantitative ideas that can help improve your trading!

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