NR7 or Narrow Range 7 is a concept that was introduced by Toby Crabel in his book, “Day Trading with Short Term Price Patterns and Opening Range Breakouts”. Toby is a well-known hedge fund manager that came up with many brilliant trading ideas including the legendary Opening Range Breakout. The definition of NR7 is simply that today’s range is the narrowest compared to the previous 6 days. In his book, Toby mentioned that NR7 was created to test the theory of range contraction and range expansion. If the range of an asset gets so narrow, the probability that there will be a range expansion in the next few days increase significantly. In this blog, I want to put this idea to the test.
Below is an example of a NR7 day. The range of the last bar is the narrowest range in the last 7 days.
For the test, I pulled data from 2010 to 2021 for S&P 500, Crude Oil, Gold, and Japanese Yen futures. I try to compare the average range of the day after a NR7 day to see if there is any evidence of range contraction/expansion. Here are the results:
As you can see, there is a total of 3028 trading days in this period. A NR7 day occurred about 14% – 15% of the time in all assets. We can also see that the average range of the day after a NR7 day is much wider. On average, the next day’s range is about 46% to 72% larger than a NR7 day’s range between these assets. That is pretty significant! One last thing to point out is the next day’s range is larger than the NR7 day’s range more than 80% of the time!
Based on these numbers, we can see that there is clear proof that range contraction/expansion exists, but how do we take advantage of this information? Well, we know that there is a good probability that there will be a range expansion on the day after a NR7 day, so our main strategy should be looking to trade breakouts aggressively and avoid fading or mean reversion strategies on this kind of day.
Now, let’s try to create a strategy together. We will use the range expansion tendency in a NR7 day together with a very strong tendency in the stock market which is that “stocks only go up…”.
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:
Looking at the equity curves, we can see that there are not too many trades, but there is also no big drawdown. The number of trades seem to be around 50% of the total number of NR7 days. As for the equity curves, both are trending up steadily.
Disclaimer: I am not a financial advisor. All information in this blog is for educational purposes only.