Narrow Range Bar Trading Strategy

The narrow range bar or NR bar for short is a popular trading strategy that offers fixed stops and target levels. It can be used across any chart interval and the strategy in itself is built on solid principles. The concept of the ‘Narrow Range bar‘ strategy is based on price action and states that when the range (High – Low) is the lowest or the narrowest within the past ‘x‘ number of bars, it is indicative of a big move (either to the upside or downside). However, the NR bar strategy has many variations. One of the most popular methods is to take long positions when an NR Bar set up is formed above the 100, 200 or 250 SMA and short positions are preferred when an NR Bar set up is formed below any of those longer term moving averages. Also accompanying the NR Bar set up is the ATR (Average True Range) whose value is used to determine the stops and target levels. The entry price for NR Bar is often the high or the low which varies by an offset of a few pips.

In this NR Bar trading strategy, we apply the same principles but use a more logical approach towards when to pick long or short entries.

The Narrow Range Bar Chart Set Up

We believe that an OHLC bar chart works best to visually identify the narrow range bars. It is entirely up to the trade to pick the count of 3 or 7, although a narrrow range after 7 bars holds more validity.

We make use of the ATR indicator to get the average true range value. The settings of the ATR are again not set in stone, so the ATR periods could be 10, 20 or 14 depending on the chart interval you wish to trade.

The image below shows the NR Bar Chart Set up for a daily chart interval.

Narrow Range Bar - Chart Set up
Narrow Range Bar – Chart Set up

NR Bar Trading Strategy

For those who want to trade the daily chart interval, we recommend using an ATR setting of 10 or 20 (which translates to 2 weeks or 4 weeks of ATR). As a filter, we make use of a 10 or 20 EMA..

The chart set up below shows a 10EMA with a 10 ATR on a daily chart. The trade rules are easy to make use of.

Short Entry
Entry: At low of the NR Bar
Stops: High + ATR(10) Value of the NR Bar
Target1: Low – 2xATR(10) Value of the NR Bar
Target2: Low – 3xATR(10) Value of the NR Bar

Narrow Range Bar: Short Set Up Example
Narrow Range Bar: Short Set Up Example

In the above chart, we have the ATR value of 0.0138. So the short set up would be:

Sell @ 1.51684
Stops @ 1.53979 (High: 1.52599 + ATR(10) 0.0138 = 1.53979)
Target1 @ 1.48924 (Low: 1.51684 – 2xATR(10) 0.0138) = 1.48924)
Target2 @ 1.47544 (Low: 1.51684 – 3xATR(10) 0.0138) = 1.47544)

In terms of trade management, traders can close one position when target1 is reached and move stops to break even to let the rest of the trade play out at no risk.

Long Entry
Entry: At high of the NR Bar
Stops: Low – ATR(10) Value of the NR Bar
Target1: High + 2xATR(10) Value of the NR Bar
Target2: High + 3xATR(10) Value of the NR Bar

The chart below shows the NR7 long trade set up which was achieved quite easily.

Narrow Range Bar: Long Set Up Example
Narrow Range Bar: Long Set Up Example

NR7 Trading Strategy Caveat

If you looked carefully at the above two short and long set ups, you might notice that we picked entries after price crossed above the 10EMA and then retraced back to the EMA the first time around.

We find that such set ups have a higher probability of reaching its target as compared to simply picking longs above EMA and shorts below EMA’s.

The same strategy could also be applied to weekly charts. The settings for the indicators would however differ. For weekly intervals, we use 13EMA and ATR13. For the very long term trades, one could also use a 52EMA and 52ATR, but that is something entirely up to the trader to figure out what time frame and settings they want to use. The important takeaway though is that the EMA and ATR should have same values to make it easier for making trading decisions.

NR7 with Ichimoku’s Chikou Span

Another way to trade the NR7 method is by using the Ichimoku’s Chikou span or lagging line. For this method, we make use of just the Ichimoku Cloud and the lagging price line. Short entries are when price is below the cloud and the Chikou span is below past price. The opposite for long positions. Of course, an EMA can also be added so as to take entries when price reverts or retraces to the moving average line.

The chart below is an example of a short trade set up. Notice that here again, the most important aspect has been that we take a short entry only when price retraces back to the EMA, with the Ichimoku giving the larger bearish bias.

Narrow Range Bar with Ichimoku
Narrow Range Bar with Ichimoku

Traders can therefore make use of their own combination of methods to ascertain the larger trend and then make use of pullbacks or retracements to identify the Narrow Range bars and trade accordingly. Another example would be to make use of weekly/monthly pivot levels as well, or even trend lines and channels.

Why trade the NR7 Method?

Advantages

  • Easy to spot and trade
  • Works across any time frame, although we recommend limiting it to H4, Daily and Weekly
  • Trade management with BE, Target 1 and Target 2 ensures to let the winners run
  • Can be used along with existing trade strategies such as MA crossovers

Disadvantages

  • It is essential to pick the right entry and not based on a general rule of shorting below an EMA or long positions above EMA

In conclusion, the Narrow Range bar makes for a great way to compliment either your existing strategy or can be traded by itself as shown above. A combination of price action sentiment combined with the indicators represents a good volatility based trading strategy.

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