The Principle of Contraction/Expansion | Toby Crabel

 

Price always moves from Consolidation to Expansion, never from Consolidation to Reversal or from Consolidation to Retracement. After an Expansion, two possible scenarios can occur: either a Retracement or a Reversal, followed by another Expansion or Consolidation. That’s it—it happens over and over again. 

» 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

 

Reference:
Toby Crabel (1990) - Day Trading With Short Term Price Patterns And Opening Range Breakout.

Jack Corsellis (2023) - Toby Crabel - Secret Trading Strategies of Billionaire Trader Revealed. (video)

Jarrod Goodwin (2023) - Testing Toby Crabel's Narrow Range NR4 Breakout Strategy on Daily and 4 Hour Time Frames. (video)
Ali Casey (2023) - Toby Crabel's Narrow Range NR4 Pattern. (video)

NR4 & NR7 (Narrow Range 4 & 7) and ID (Inside Days) | Toby Crabel

Narrow range patterns were described by Tony Crabel in his book, "Day Trading with Short Term Price Patterns & Opening Range Breakout". Even though it was published in 1990, many of Crabel's concepts and set-ups are still effective, and in particular his NR4 (Narrow Range 4) and NR7 (Narrow Range 7) patterns became quite popular with short-term traders. The idea for set-ups is similar to the Bollinger Band Squeeze or Short-Squeezes and Long-Squeezes in general: a volatility contraction is followed by a volatility expansion; narrow range days mark price contractions that precede price expansions. The NR7 day and the NR4 day as such are 'neutral' when it comes to future price direction, and other tools need to be employed to determine directional bias. Because NR4/NR7 days are relatively commonplace and the range is small by definition, the chances of whipsaw are above average. A break above the NR7 high can fail and be followed by a break below the NR7 high. Just be aware of this probability and keep the bigger picture in mind. In other words, be wary of sell signals within a bullish pattern, such as a falling flag or at a support test.

 

Examples of Narrow Range 7 Inside Days (IDnr7) in the Nasdaq.

Traders will want to qualify NR7 signals because they are quite frequent. A typical instrument will produce dozens of NR7 days in a twelve month period and a daily scan of US stocks will often return hundreds of stocks with NR7 days. Traders can increase or decrease the number of narrow range periods to affect the results. A decrease from NR7 to NR4 would increase the number of instruments fitting the criteria, while an increase from NR7 to e.g. NR20 would decrease the number of signal days. Consider NR7 and NR4 days that are at the same time Inside Days (IDnr4, IDnr7) also as signal days (see chart above).

Strategy: This strategy starts with the day's range, which is simply the difference between the high and the low. Crabel used the absolute range, as opposed to the percentage range, which would be the absolute range divided by the close or the midpoint. Because we are only dealing with four and seven days, the difference between the absolute range and percentage range is negligible. Crabel focused on two different narrow range timeframes: four days and seven days. An NR4 pattern would be the narrowest range in four days, while an NR7 would be the narrowest range in seven days. It is a very short-term pattern designed to initiate a trade based on an "opening range breakout", which is another term from Crabel's book. Look for an upside breakout when prices move above the high of the narrow range day and a downside breakdown when prices move below the low of the narrow range day.

Bull Signal:

1. The daily bias is bullish.
2. Identify a NR4, a NR7, an IDnr4 or an IDnr4 day.
3. Buy on move above high of narrow range day high.
4. Set trailing stop-loss.

Bear Signal:

1. The daily bias is bearish.
2. Identify a NR4, a NR7, an IDnr4 or an IDnr4 day.
3. Sell on move below low of narrow range day low.
4. Set trailing stop-loss.

Targets: Because this is a short-term setup, it is important that the trade starts working right away. Failure to continue in the direction of the signal is the first warning. After a buy signal, a move below the low of the narrow range day would be negative. Conversely, a move above the high of the narrow range day would negate a sell signal. Consider profit targets and stop-losses. Crabel took profits quite quickly, usually at the close of the first trading day or on the first profitable close. Again, this is very short-term-oriented and might not be suitable for all traders. Alternatively, profits can be taken near the next resistance levels or a percentage target can be used. Base stops on previous highs and lows, the Average True Range (ATR), etc. For example, the stop-loss on a long position could be set two ATR values below current prices and trailed higher.

 

Reference:
Toby Crabel (1990) - Day Trading With Short Term Price Patterns and Opening Range Breakout.

Toby Crabel (1990) - Inside Days in the S&P 500.

 Oddmund Groette (2023) - NR7 Trading Strategy (We Improved It).
Oddmund Groette (2023) - Inside Day Trading Strategy – Does It Work? (Backtest). 

TPR (2023) - Trend Continuation Entry Strategies.

Inside Days in the S&P 500 │ Toby Crabel

Toby Crabel (1990) - Computer studies suggest that Inside Days (ID) provide very reliable entries in the S+P market. The data used in the studies is daily open, high, low and close prices from 1982 to 1987. All of the following patterns are defined for a computer but can be seen easily on a daily bar chart.

• Pattern (1) is simply an inside day followed by a sale (s) on a lower open or buy (b) on a higher open. Entry is on the open with an exit on the same day's close with no stop. This procedure produced sixty-eight percent winning trades with profits of $18,000 after an $18 commission. This is a reasonably high percentage and suggests a strong bias in the direction of the open after any ID.

• Pattern (2a) is defined as an ID with a higher close than the previous day followed by a higher open. A buy is taken on the open and exited on the close. The same is done on the sales (Pattern (2b)) if there was an ID with a lower close followed by a lower open. Again, stops were not used. There were forty-four trades as such with seventy-four percent of them profitable. Net profit was $14,914. The percentage has improved and profits are better per trade than Pattern (1). This supports the premise that the closing effects the next day's action and potential breakout. Further tests uncover some variations to above results. Although the opening direction after an inside day appears to be a valid indicator of upcoming direction, there are same specific patterns that show very high percentage profitability without the use of the previous day's closing direction. Specifically, two patterns; one a sale (Pattern (3)), one a buy (Pattern (4)).

• Pattern (3): The day of entry is called Day 1. The day of immediately preceding the entry is Day 2 and each preceding day - 3, 4, 5, etc. On Day 1 an open lower than Day 2's mid-range and lower than Day 2's close is necessary. Day 2 must be inside of Day 3. Day 3 must have a higher low than Day 4. A sale is made on the open of Day 1 with exit on the close of Day 1. Profits were eighty percent with winning trades five times the size of losing trades. The only shortcoming is that only ten trades could be found from 1982-1987.
  

• Pattern (4) is similar to Pattern (3) with opposite parameters. The only exception is the open on Day 1 need only to be higher, not above mid-range. So to review Pattern (4), Day 1 a higher open than Day 2. Day 2 inside Day 3. Day 3 lower high than Day 4. Results were as follows: Ninety-one percent profits; 860 to 820 average winner to average loser. No stops were used.  Only eleven patterns to the upside were found.

The market action implied in each pattern is a short-term trend with a loss of momentum on the Inside Day.  The open on Day 1 is in the opposite direction of the trend and is an indication of a shift in sentiment. This shift in sentiment causes those who still have existing positions against the opening direction to liquidate longs or cover shorts. Participants covering their positions is more than enough to tip off a directional move.

A slightly different perspective on the same type of pattern is to look for a retracement to the previous day's close after the opening and take a position at that point in the direction of the open. I tested four patterns to demonstrate this principle.

• Pattern (5) shows an Inside Day with a lower close on Day 2 than Day 3.  Day 1's open is above Day 2's close. The chances are sixty-two percent that the market will close above Day 2's close on Day 1.
• Pattern (6) is an Inside Day on Day 2 with a higher close than Day 3. Day 1's open is above Day 2's close. The chances are seventy-nine percent that the market will close above Day 2's close on Day 1.
• Pattern (7) shows an Inside Day on Day 2 with a lower close than Day 3's close. Day 1's open is below Day 2's close. The chances are fifty-nine percent that the close on Day 1 will be lower than Day 2's close.
• Pattern (8) shows an Inside Day on Day 2 with a higher close than Day 3's close. Day 1's open is below Day 2's close. There is a sixty-seven percent chance that the market will close below Day 2's close on Day 1.

How can you use this information? It suggests a strong bias in the direction of the open especially after a higher open. The prolonged bull market obviously had an impact on these results but in general, a counter move back to Day 2's close after the opening direction is known, should be observed for a loss of momentum and possible entry in the direction of the open.
 
Another totally different test in the S+P has same interesting implications and could be tied in with the previous patterns. On any day that the market has moved two hundred points above the open intra-day, it has closed above the open ninety percent, of the time. Also, on any day that the market has moved two hundred points below the open it has closed below the open eighty-eight percent of the time. This was during the period from 1982-1988.

An application of these results is as follows: Enter in the direction of the initial trend on any low momentum move back to the open and exit on the close of the session. This can be done after the initial trend is established with a two hundred point move in one direction off the open. The main qualification is price action on the pullback. A high momentum move back through the open leaves the initial two hundred point move in question. This can also be applied after an Inside Day very effectively.

I think it is necessary to shed light on how extraordinary the results for Inside Days are: A test on a sale of a higher open or buy of a lower open with no other information to work with provides a winning trade fifty-six percent of the time when exiting on the close the same day of entry. This suggests a natural tendency for the market to reverse the opening direction by the time of the close.

This natural tendency is reversed after an ID. Why? What is it about an ID that produces follow through after the open? An ID is narrower than the previous day. Any narrowing day shows loss of momentum and when within a previous day's range it forms a congestion area. A congestion is directionless trade with the market searching for new information. A temporary state of balance or equilibrium exists.

There is a tendency for the market to trend after a congestion. If an Inside Day is a valid congestion, it will produce an imminent trend day. One can assume from the above tests that there is a tendency to trend after these patterns (ID). These tests support the premise that Inside Days are valid congestion areas. It appears that market participants act on the first piece of information indicating trend after the Inside Day - the open. Also, the direction of the close on the ID will provide further clues on the direction of the breakout when added to the information of opening direction. The increase in percentage profit and relative profits when these variables are added supports this conclusion.

The ID pattern acts as a continuation 62% of the time. A breakout occurs when price closes either above the top of the pattern
or below the bottom of it. Since inside days act as a continuation pattern, expect the breakout to be in the same direction as
the inbound price trend. Wait for price to either close above the top or below the bottom of the pattern before taking a position.
The ID can form midway in a price trend, just like bull flags, wedges and pennants.

Why do these indications work so well in the S+P? The S+P generally is an urgent market. The distinguishing characteristic of this market is its tendency to trend throughout the session. This market is notorious for big, fast moves intra-day. Peter Steidlmayer (Markets and Market Logic) calls it a One-Time Frame market. One may reason that in a One-Time Frame market the inside day is a more reliable indication of upcoming trend than in a Two-Time Frame market. The market principle that is in force is contraction/expansion. The Inside Day is contraction, and in a One-Time Frame market 1-Day contraction is all that is necessary to tip off a directional move.

In summary, the above tests suggest that an Inside Day is a valid congestion area and it follows that all breakout rules for congestion areas should be implemented after an Inside Day forms. The resulting breakout is expansion.

Three-Bar Inside Bar Pattern by Johnan Prathap - HERE & HERE

[...] 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. A Trend Day is defined as a day when the first hour's trade comprises less than 10% of the day's range or the market has no dominant area of trade throughout the session. Trend days are characterized by an opening near one extreme and a close on the opposite extreme of the daily range. Trend days fall into the category of expansions. Congestion is a series of trading days with no visible progress in either direction. Usually associated with narrow range days or non-trend days. Contraction is a market behavior represented by a congestion or dormant period either short-term (ID) or long-term narrow range (8 Bar NR) and usually reaching its narrowest phase at the end of the period.

References:

Toby Crabel (1990) - Day Trading With Short Term Price Patterns and Opening Range Breakout
Contraction > Breakout > Expansion | Toby Crabel's Price Patterns 

Perry J. Kaufman (2019) - Trading Systems and Methods

Alex's Options - Trading Inside Bars

S&P 500 Index vs Equity Put / Call Ratio | Overbought

Up-Turn on Dec 26 (Wed) on decreasing volume
+ (P/C Ratio + RSI2 @ Extremes + NR4/NR7 + Negative Close above 3DMA)
= High + Sideways to Down on Dec 31 (Mon) into Jan 03 (Thu) = Perihelion |
Jan 5 (Sat) = New Moon + Solar Eclipse

SPX vs CBOE Equity Put / Call Ratio | VIX | Fear & Greed Index | NR7

Jul 01 (Fri) = NR 7

The 4 Lunar Month Cycle suggests sideways-to-up of the VIX into Jul 6 (Wed) = sideways-to-down in US-Stock Indices

Near a top.
Source: CNN Fear & Greed Index

SPX: NR7 Inside Day | Bull Pennant Flag | Put / Call Ratio | VIX

June 21 (Tue) formed a narrow range inside bar - usually a trend continuation pattern (HERE).
Oscar Carboni sees a Bull Pennant Flag on the daily ES (HERE).

The daily range was the narrowest of the last 8 trading days (HERE), and volume contracted.
Today a breakout of yesterday's range is  likely.
However, Brexit-Thursday (Jun 23) is the next solunar turn-day, and the market may just wait for that.

Room to the top.
Source: CNN Fear & Greed Index

Definition of Price Patterns | Toby Crabel

Toby Crabel wrote a book called 'Day Trading With Short Term Price Patterns and Opening Range Breakout' which is no longer in print and sometimes sold on eBay for more than $1,000. In this book he defines a number of trading patterns which have become popular numbers to calculate and watch among day traders and swing traders. He is a United States self-made billionaire commodities trader. The Financial Times called him "the most well-known trader on the counter-trend side." He is the fund manager of 'Crabel Capital Management', ranking number 101 out of 196 funds on Absolute Return magazine list Absolute Return survey of U.S. groups with more than $1 billion AUM, July 2005. This is the latest current ranking of the top 196 money managers in the US. Toby Crabel manages 3.2 billion dollars and had a growth of 16.7% in 2005. A producer of consistent returns whatever the weather, Crabel had avoided having a losing year from 1991 to 2002. The following are definitions of some of Crabel's concepts, patterns and setups.

Stretch

The Stretch is calculated by taking the 10 day Simple Moving Average (SMA) of the absolute difference between the Open and either the High or Low, whichever difference is smaller.
 

For example, if the Open is 1250, the High is 1258, and the Low is 1240, then we would take the value of 8 for that day because 1258-1250 is 8 which is smaller than 1250-1240 which is 10. We then add together all of these values for the last 10 trading days and divide this by 10 to get the 10 day SMA. This value will then become the Stretch. Stretch Calculation:

1.  Take the Open, High and Low of each day.
2.  Find delta of High - Open.
3.  Find delta of Open - Low.
4.  Which ever is lower between step 1 and step 2 take that value for each day.
5.  Stretch = average of the values of past 10 days.

The Stretch is used in calculating where to enter the trade and where to place a stop using the ORB and ORBP trading strategies. Before buying and selling the Stretch, also consider support and resistance-levels derived from the Daily Classic Pivot Point.

Opening Range Breakout = ORB

Using this strategy, the trader places a buy stop just above the Open price plus the Stretch and a sell stop just below the Open price minus the Stretch. The first stop triggered enters the trader into the trade and the other stop becomes the protective stop.

 

Crabel's research shows that the earlier in the trading session the entry stop is hit the more likely the trade will be profitable at the close. A market movement that kicks off a trend quickly in the current trading session could add significant profit to a trader's position by the close and should be considered for a multi-day trade.

 

The ORB can be utilized as a general indicator of bias every day. Whichever side of the stretch is traded first will indicate bias in that direction for the next two to three hours of the session. This information alone will keep you out of trouble, if nothing else.

 

Multiple contracts can be used when entering on an ORB or ORBP. This allows for some profit taking as the move continues to guarantee at least some profit in the case of a pullback to the break-even stop. A trailing stop is also very effective.
 

If you miss the ORB and early entry occurred, any 3/8 to 1/2 retracement of the established range can be used as an entry point with stops beyond the 5/8 level. This technique can be utilized twice, but becomes treacherous on the third retracement.

Extending Crabel's research results it is obvious that as time passes and we are not filled early on then the risk increases and it becomes prudent to reduce the size of the position during the day. Trades filled towards the end of the day carry the most risk and the later in the day the trade is filled the less likely the trader will want to carry that trade overnight. Variations of this strategy include the Opening Range Breakout Preference (ORBP - HERE).

Opening Range Breakout Preference = ORBP

An ORBP trade is a one sided Opening Range Breakout (ORB) trade. If other technical indicators show a strong trend in one direction then the trader will exercise a "Preference" for the direction in which to trade the ORB trade. A stop to open a position would be placed on the side of the trend only and if filled a protective stop would then be placed. The calculation of where to place the "stop to open" would be the same as that for the ORB trade: For longs, the Open price plus the Stretch and for shorts the Open price minus the Stretch. The ORBP trade is a specialized form of the ORB trade (HERE).  

Narrow Range = NR

If a price bar's Range is less than the previous bar's range it is said to have an NR. The opposite of NR is Wide Spread (WS). NR is technically NR2 when compared to NR4, NR5, and NR7.

Type: Trend-Continuation or Short-Term Breakout Set-up.
Conditions: The current bar has the narrowest range (high - low) of the last X bars. The bar may or may not be an inside bar. Buy and Sell reference are the high and low of the NR bar.

 

Narrow Range 4 = NR4

If a price bar's Range is less than the previous 3 bars' ranges (measured independently) it is said to have the narrowest range in 4 days or NR4. The opposite of NR4 is WS4. NR, NR5, and NR7 are also closely watched price patterns. 

Type: Trend-Continuation or Short-Term Breakout Set-up.

Narrow Range 5 = NR5

If a price bar's Range is less than the previous 4 bars' ranges (measured independently) it is said to have the narrowest range in 5 days or NR5. The opposite of NR5 is WS5. NR, NR4, and NR7 are also closely watched price patterns. 

Type: Trend-Continuation or Short-Term Breakout Set-up

Narrow Range 7 = NR7

If a price bar's Range is less than the previous 6 bars' ranges (measured independently) it is said to have the narrowest range in 7 days or NR7. The opposite of NR7 is WS7. NR, NR4, and NR5 are also closely watched price patterns.

Type: Trend-Continuation or Short-Term Breakout Set-up.

Wide Spread = WS

If a price bar's Range is wider than the previous bar's range it is said to have a WS. The opposite of WS is NR. WS is technically WS2 when compared to WS4, WS5, and WS7.

Wide Spread 4 = WS4

If a price bar's Range is wider than the previous 3 bars' ranges (measured independently) it is said to have the widest range in 4 days or WS4. The opposite of WS4 is NR4. WS, WS5, and WS7 are also closely watched price patterns.

 

Wide Spread 5 = WS5

If a price bar's Range is wider than the previous 4 bars' ranges (measured independently) it is said to have the widest range in 5 days or WS5. The opposite of WS5 is NR5. WS, WS4, and WS7 are also closely watched price patterns.

Wide Spread 7 = WS7

If a price bar's Range is wider than the previous 6 bars' ranges (measured independently) it is said to have the widest range in 7 days or WS7. The opposite of WS7 is NR7. WS, WS4, and WS5 are also closely watched price patterns. 

Inside Day/Bar = ID

If the high of the current day is lower than the high of the previous day AND the low of the current day is higher than the low of the previous day then we have an ID or Inside Day. The opposite to an ID is an Outside Day (OD).  
Type: Trend-Continuation or Short-Term Breakout Set-up.

Outside Day/Bar = OD

If the high of the current day is higher than the high of the previous day AND the low of the current day is lower than the low of the previous day then we have an OD or Outside Day. The opposite to an OD is an Inside Day (ID).

Bear Hook

Bear Hook is a day in which the open is below the previous day's low and the close is above the previous day's close with a narrow range relative to the previous day. As implied by the name there is a tendency for the price action following a Bear Hook to move to the downside. In other words: A Bear Hook occurs when you have an NR with the Open less than the previous bar's Low AND the Close greater than the previous bar's Close.

 

 

Bull Hook

A Bull Hook occurs on Day 2. A Bull Hook is defined as a day with a higher open than the previous day's high followed by a lower close with a narrowing daily range. The next day (Day 1), a trade is taken on the initial move off the open, preferably to the upside.In other words: A Bull Hook occurs when you have an NR with the Open greater than the previous bar's High AND the Close less than the previous bar's Close.

Inside Day/Bar Narrow Range 4 = IDnr4

IDnr4 is an Inside Day (ID) with a Narrow Range 4 (NR4). This is a combination of an ID and an NR4. This happens when the current day's high is lower than the previous day's high AND the current day's low is higher than the previous day's low AND the range is the narrowest when compared to the previous 3 trading days. 

2-Bar Narrow Range = 2BNR

If the 2-day-range (the higher of the 2 highs less the lower of the 2 lows) is the narrowest 2-day-range in the last 20 trading sessions then we are currently sitting on a 2BNR.

 

3-Bar Narrow Range = 3BNR

If the 3-day-range (the higher of the 3 highs less the lower of the 3 lows) is the narrowest 3-day-range in the last 20 trading sessions then this is true.

4-Bar Narrow Range = 4BNR

If the 4-day-range (the higher of the 4 highs less the lower of the 4 lows) is the narrowest 4-day-range in the last 30 trading sessions then this is true.

8-Bar Narrow Range = 8BNR

If the 8-day-range (the higher of the 8 highs less the lower of the 8 lows) is the narrowest 8-day-range in the last 40 trading sessions then this is true.

 

Reference:

Toby Crabel (1990) - Day Trading With Short Term Price Patterns and Opening Range Breakout.

 

See also:

Toby Crabel (1990) - The Principle of Contraction/Expansion.