Showing posts with label Oddmund Groette. Show all posts
Showing posts with label Oddmund Groette. Show all posts

Monday, September 25, 2023

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.

Friday, September 15, 2023

Trend Reversal Entry Strategies

Trend-Reversal Entry Strategies aim to buy at or near the bottom and to sell at or near the top. Advisors and educators often reject these strategies because their technical analysis relies on lagging indicators. However, there are three high probability two-bar reversal patterns: the Reversal Day, the Signal Day and the Snap-Back Reversal Day. These are low-risk trend-reversal entry strategies for short-term trading and swing-trading. The set-ups are identified on the daily chart and the entries executed on the hourly chart or lower timeframes. The profit/loss ration needs to be 1.5 or more. Proper knowledge of market structure and price action is required.
 
How reliable are these 'text book' patterns?
Brent Penfold (2017) - Reversal Patterns.
Oddmund Groette (2023) - Reversal Day Strategy Backtest – Does It Work?

Reversal Day Trade Entry Set-Up
A Reversal Day top forms when price makes a new daily high but the day closes below the prior day's close. The current day's open and the trend to new highs is not sustained by the close. Variations of the Reversal Day are the Key Reversal Day, the Outside Reversal Day and the Outside Key Reversal Day.
 

On a Key Reversal Day the market opens below the prior day's close, makes a new high, but closes below the prior day's close and the current day's open. A Key Reversal Day is a stronger reversal signal than a Reversal Day. Outside Reversal Days and Key Reversal Days are both Outside Days and meet the criteria of the Reversal Day. Outside Reversal Days are stronger reversal indicators than Reversal Days, and Outside Key Reversal Days are even more convincing that a daily reversal has taken place. In all cases the Initial Protective Stop Loss is one tick above the high.

Signal Day Trade Entry Set-Up
A Signal Day opens above the prior day's close, makes a new high and the close is below the current day's open. The open must be in the top 1/3 of the daily range and the close must be in the bottom 1/3 to qualify as a valid Signal Day. Unlike a Reversal Day, the Signal Day's close does not have to be below the prior day's close, only below the current day's open.

The Gap Signal Day is a very strong daily reversal indicator. The entire daily range of the Gap Signal Day is above the prior day's range, leaving a gap at the end of the day. Considering the positive up close as bullish is a misleading view of a Gap Signal Day.
 

In both cases the Initial Protective Stop Loss is one tick above the high of the Signal Day.

Snap-Back Reversal Day Trade Entry Set-Up
This is a two-day reversal setup. On Day One the market makes a new high with an open in the lower 1/3 of the daily range and the high in the lop 1/3. It appears to be a very bullish day. Day Two is the Snap-Back Day with the open in the top 1/3 of the daily range and the close in the bottom 1/3. Day Two does not have to reach new highs or lows compared to Day One. The wider the range of Day One and Day Two, the stronger the indication for a reversal. A stronger Snap-Back Reversal Day has Day Two's open below Day One's close with a new daily low and a close below the prior day's low. 


The Initial Protective Stop Loss is one tick above the higher of the two days.
 
All of the above daily reversal patterns frequently occur within a trend without resulting in a sustained change of trend. Hence daily reversal set-ups are only to be considered valid when time, price and patterns are indicating a termination of the trend. 

Trend Continuation Entry Strategies

Trades can be entered after a new trend is already established. There are three low-risk trend continuation entry strategies for short-term trading and swing-trading. The set-ups are identified on the daily chart and the entries executed on the hourly chart or lower timeframes. The profit/loss ratio needs to be 1.5 or more. Proper knowledge of market structure and price action is required.
 
Inside-Day Trade Entry Set-Up
The price range of an inside-day is within the price range of the previous day. An inside-day is a day of indecision. It is a day when traders do not have strong conviction as to the trend of the market. An inside-day often occurs after a wide-range day when the range exceeded the average range of the prior few days. Inside-days also often occur either after a trend reversal or after a fast move as a brief period of consolidation within a larger trend. Usually, the direction of the breakout from the inside-day is a continuation of the direction prior to the inside-day. 


Inside Day Buy Set-Up Rules:
  1. Only enter in the direction of the trend  against the last pivot reversal.
  2. Enter a buy position, as long as the low of the day prior to the inside-day has not been exceeded, or, on the day following the inside-day, buy at one tick above the high of the day prior to the inside-day.
  3. Place the initial protective sell stop one tick below the lower of the low of the inside-day or the low of the entry day.

Outside Day Trade Entry Set-Up
An outside-day is a period of range expansion. A market usually continues in the direction of the close of an outside-day. The outside-day entry setup requires the market to be monitored during the day.
 

Outside Day Buy Set-Up Rules:
  1. Only enter in the direction of the trend.
  2. For a buy set-up, if the market first exceeds the low of the prior day without having exceeded the high of the prior day, buy one tick above the high of the prior day.
  3. Place the initial protective sell-stop one tick below the low of the entry day up to the time the trade is entered.
  4. Exit the position on the close if the close is below the current day's open and prior day's close. The failure of the close to be in the anticipated trend direction is a negative signal and reason to exit the trade.

Pull Back Trade Entry Set-Up
The Pull-Back entry strategy is based on the observation that minor corrections in trending markets usually only last some three days. The Pull-Back trade set-up enters a trade on minor corrections against the main trend.
 
 
Pull Back Buy Set-Up Rules:
  1. Only enter in the direction of the trend.
  2. For a sell set-up, the three most recent days must each have higher highs or any combination of two higher highs and an inside-day. Just the opposite for a buy set-up.
  3. For a sell set-up, place a sell-stop one tick below the low of the prior day once the set-up conditions are met.
  4. If the market makes a new high, adjust the sell-stop one tick below the low of the prior day.
  5. Place the initial protective buy-stop one tick above the higher of the high of entry day or the day prior to entry.
  6. Exit the position on the close of the entry day if the close is above the current day's open and the prior day's close.
Keep in mind, no single strategy is bulletproof, stop-loss strategies must be in place and the profit/loss ratio 1.5 or more. Trading is about probabilities and losses part of the trading-business.