INSIDE DAY NR4 (ID/NR4) TRADE SETUP
Toby Crabel did some serious work on volatility patterns in price movement. The Inside Day/NR4 (ID/NR4) is one of the patterns he wrote in “Day Trading with Short Term Price Patterns and Opening Range Breakout“.
An inside day is one with a lower high and higher low than the previous bar. NR4 is a bar with the narrowest range among the last 4 bars.
Hence, ID/NR4 is an objective criterion for identifying days of decreased range and volatility.
Once an ID/NR4 is found, we trade the breakout as volatility resumes.
TRADING RULES FOR ID/NR4
RULES FOR LONG
1. An inside bar with the smallest range among the last 4 bars. 2. Place buy stop order above the high of the bar. 3. Wait for break-out to trigger order.
RULES FOR SHORT
1. An inside bar with the smallest range among the last 4 bars. 2. Place sell stop order below the low of the bar. 3. Wait for break-out to trigger order.
TRADING EXAMPLES FOR ID/NR4
WINNING TRADE
This chart shows the daily prices of EUR/USD. The green arrow marks an inside day with the smallest range among the last 4 bars (ID/NR4).
We placed a buy stop order placed at the high of the ID/NR4 was triggered the next day. Prices went up for the next few days.
The preceding bullish price action was great for this long position.
1. The outside bar with a long bottom tail points to buying pressure. 2. The buying pressure was sustained by the bullish follow through. 3. The 3 bearish bars before our signal bar was strong but the support from the previous swing low (blue line) held up. The bar that tested the support showed a long bottom tail (buying pressure).
LOSING TRADE
This daily chart of chemical giant DuPont listed on NYSE shows an ID/NR4 (green arrow).
We entered the next day as prices broke the high of the ID/NR4 bar. Prices moved sideways for a few days before stopping us by breaking out of the low of the ID/NR4 pattern.
Dupont was trapped in a range. In a range, we should sell high and buy low. However, the ID/NR4 gave a buy signal at the top of the range.
Let’s take a look at the specifics.
1. After the break down of prices, a clear double bottom was formed. 2. Prices bounced off the double bottom with bullish action. 3. This terrible reversal bar (gravestone doji) confirmed that DuPont has entered a range. This single bar should deter most traders from going long until more bullish action unfolds beyond the range (marked by the two blue lines).
REVIEW – INSIDE DAY NR4 (ID/NR4)
ID/NR4 are days with low volatility and small range.
Unlike the Bollinger Squeeze which identifies a drop-in volatility over a number of bars, ID/NR4 shows only a single bar contraction in volatility. Accordingly, ID/NR4 is a short-term volatility pattern.
Hence, it is crucial to look at the price action context before taking any trades with ID/NR4. Experiment with a trend filter like a moving average and pay more attention to the price action context.
The winning example shows that, given the right context, this pattern is a great low-risk trigger.
However, if the market is in a range, the ID/NR4 pattern might be part of a prolonged congestion. The inside bar might even be a trap. Although We did not include any intraday trading examples, We have observed similar results while day trading.
