Friday, June 14, 2024

The Principle of Contraction/Expansion | Toby Crabel

 » The principle of Contraction/Expansion is defined as the market phenomenon of change from a period of rest 
to a period of movement back to a period of rest. This interaction between the phases of motion and rest 
are constantly taking place, with one phase directly responsible for the others' existence. «  
Toby Crabel, 1990
In his study 'Day Trading with Short Term Price Patterns and Opening Range Breakout' Toby Crabel defined the following range contraction and expansion patterns:

NR4 - The narrowest daily range relative to the previous three day’s daily ranges compared individually.
NR7 - A day with a daily range that is narrower than the previous six day’s daily ranges compared individually.
WS4 - (Widespread 4) A day with a daily range that is larger than any of the previous three day’s daily ranges.
WS7 - (Widespread 7) A day with a daily range that is larger than any of the previous six day’s daily ranges
             compared individually.

His key findings were: A cumulative total of Gross Profits for the contraction patterns vs expansion patterns on trades in the direction of the move off the open showed $710,000 for contractions on 7,313 trades and $102,000 for expansions on 7,524 trades. Profits were seven times larger for ORB (Opening Range Breakout) trades after contractions than expansions.

» Clearly something is going on here. The suggestion from these results is that one should be looking to go with a forceful move off the open after a contraction and not willing to do so after an expansion. In fact, fading price action off the open, with trend, after an expansion is a consideration. Other patterns can help with the decision on whether to fade a move off the open along with previously mentioned market context. If nothing else, one should be aware of the dangers of ORB trades the day after a big directional day. Caution is necessary after expansions. This is when the most attention is given to the market by the novice trades who invariably get caught in whipsaws and trendless markets. «  

Bitcoin - Inside Bar Narrow Range 4 (ID/NR4)
in monthly, weekly, daily and 4 hour bar charts.

» An object at rest stays at rest and an object in motion stays in motion with the same speed 
and in the same direction unless acted upon by an unbalanced force. «
Isaac Newton's 'First Law of Motion', 1687