Narrow Range trading strategy or NR7 Trading strategy is a breakout based method which assumes that the price of a security trends up or down after a brief consolidation in a narrow range. The default look back period of this strategy is 7 days which means that if the price range of any particular days is lowest as compared to last 7 days, then that day is termed as NR7 day. Here the range is calculated as the difference between High and Low of the particular day. The day following NR7 day acts as a confirming factor on where the price will move further. Breakout of the High of NR7 candle with high volumes indicates bullishness, while breakout of Low of NR7 candle indicates bearishness. The philosophy behind the pattern is similar to the Bollinger Band Squeeze: a volatility contraction is often followed by a volatility expansion. Narrow range days mark price contractions that often precede price expansions. See the below chart for visual explanation:
Further in this article we’ll go through an Amibroker trading system based on NR7 strategy. This strategy seems to work very well in indexes especially Nifty and Banknifty. It takes very few trades in the year, but still happens to catch big moves. This is the reason we named it low risk high reward strategy
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NR7 Trading Strategy Overview
|Buy Condition||Previous candle is NR7 candle, and current candle has a Gap-Up opening.|
|Short Condition||Previous candle is NR7 candle, and current candle has a Gap-Down opening.|
|Sell Condition||Based on Target and Stop Loss|
|Cover Condition||Based on Target and Stop Loss|
|Stop Loss||1% (fixed)|
|Position Size||50% of Equity|
|Brokerage||100 per order|
Click here to download the AFL code for this system.
NR7 Trading Strategy: AFL Screenshot
See the backtest report of NR7 Trading strategy on two major Indices listed in NSE.
|Backtest Period||01-Jan-2010 to 30-Sep-2016||01-Jan-2012 to 30-Sep-2016|
|Net Profit %||641.00%||745.87%|
|Annual Return %||34.59%||56.79%|
|Number of Trades||33||28|
|Winning Trade %||54.55%||53.57%|
|Average holding Period||8.24 periods||4.96 periods|
|Max consecutive losses||4||3|
|Max system % drawdown||-25.83%||-18.52%|
|Max Trade % drawdown||-34.61%||-31.09%|
Download the detailed backtest report here.
The NR7 Trading strategy has a close to linear equity curve.
Additional Amibroker settings for backtesting
Goto Symbol–>Information, and specify the lot size and margin requirement. The below screenshot shows lot size of 30 and margin requirement of 10% for Bank Nifty:
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