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An NR signal is a narrow range day or bar signal. An NR7 day or bar signal means the last price range has the narrowest trading range of the last 7 days or bars inclusive.
The NR7 signal falls into the category of Range Breakout Signals whereby the chance to catch a trending move is high.
An NR7 signal indicates that price is consolidating and energy is being stored ready for a volatile breakout one direction or the other. To trade an NR7 signal, one must first determine if they are intraday trading, swing trading or position trading.
An intraday trader will have several methods in which to trade the NR7 signal. Two effective methods are the high/low breakout, and the box breakout.
The high/low breakout simply means if the high or low of the NR7 bar itself it broken, trade in that direction.
With the box method, the trader waits 20 minutes (some traders choose other times such as 2mins for aggressive, 1 hour for conservative etc), and determines the highest and lowest prices achieved in that time frame, and creates a box based on the high and low. Once the box is broken a trade is made in that direction.
End of day traders or swing traders can employ similar methods just by setting orders with their brokers to buy or sell at the break of the high or low of the previous day.
It is not often I write publicly about my thoughts on the markets; however I feel compelled to share what I have noticed and read about in recent times, and the results of some good old research.
We have an interesting time regarding the equity markets, not only are they all moving in similar directions, many are or have been expecting most of them to rebound.
I believe we are at the moment where a bottom is about to be made that will offer a good opportunity for the next 6 months or so, however, what I also believe is that the signs or signals that create this bottom will not be what most expect.
Now, you have to admit, it’s a pretty compelling chart.
After watching this for a while and noticing its continual correlation, I decided to get down and look on a more microscopic level. And here is what I found regarding the last few months of the QQQQ and the period of the DOW being compared to on the blog above.
Before I go on, for those who don’t study Elliott Wave, don’t worry, this is not about Elliott Wave, and I’ll be making some important points to bolster my case, that have nothing to do with Elliott Wave, however for those who do, take a look at the waves. It’s just uncanny.
Now, what I also noticed (which has nothing to do with Elliott Wave), is that if you look at the last down move and the bottom, on the DOW in March of 1938 (picture below; importantly, the DJ30 went up 60% in 8 months from that low), tell me what you notice? I notice a clear lack of comparative volatility to the October low, and not only that, I see no reversal patterns or bars of any real significance; nothing that stands out like we saw in Oct. Now take a look at any recent chart such as the QQQQ, SP500, DJ30, and look at the Oct 2008 lows and see if notice a very similar theme. All technical traders would have seen this time as the bottom based on the patterns, bars and volatility. They were duped!
Now, let’s look at another piece of information I found during my reading travels. Marc Faber is a well respected voice, and he suggested that many traders will be expecting a capitulation, but will be disappointed, simply because there is no one left to capitulate. So what does this suggest? To me it suggests that at this point in time, there are more watchers of the market than there are participants, and this is easy to believe when you consider all the talk of how everyone is sitting on mounds of cash, not quite knowing where to put it.
With all this, I am putting forward the possibility that the market is going to turn around quite soon but it will not be a capitulation of market participants, but a capitulation of watchers. In other words, just as everyone gives up and turns off the TV, stops reading the Financial section, stops subscribing to newsletters, etc etc etc, then we’ll see a bottom. There will be no significant reversal bars or patterns, just a good old down day followed by an up day followed by another up day, and so on. Most will simply put this rally down to a bear market rally and that is great. This will enable the market to go in the path of least resistance, which will be up.
Just my thoughts, and for what it is worth, I will be going long stocks soon, and I am not in the camp of tight stops. They are for purely technical traders and as such I am only looking at what I am willing to lose should I be wrong and the next rally does turn out to be just a bear market rally.
In trading there is a factor known to many as the ‘R’ factor or risk factor. Traders determine their average or base risk per trade they’re willing to take and name it ‘R’, and then measure profits as a multiple of this ‘R’. For example, a 3R profitable trade means the trader has made 3 times the amount they risked. The idea is to determine the ‘R’ factor early on in the trading system building stage and keep it consistent, whether it is a fixed dollar amount or a percentage of available capital.
The benefits of using an ‘R’ factor include measurability, especially during back testing, which helps to determine a systems potential, and being able to track your trades from a systematic point of view rather than a monetary point of view. However it is the monetary point of view that I would like to address as I feel there could be another angle or point of view that could aid struggling traders, especially those that find themselves cutting winning trades short (breaking their systems rules).
First, let’s do a quick demonstration of the use of ‘R’. A trader has $20,000 in capital, and decides he wants to risk $200 of his available capital per trade. After much back testing, he finds that out of 100 trades, 40 were 1R winners, 10 were 3R winners and 50 were 1R losses. He now knows that after 100 trades he system will provide an estimated 20R profit (40R plus 30R minus 50R = 20R), and if ‘R’ is $200, then that equates to $4000. This trader can now use this information to help determine what he needs to do to reach his goals.
Now, when determining the ‘R’ factor, there is one element this trader has missed, and that is, what is his ‘R’ factor from a personal point of view? Why did he choose $200 and not $300 or $100, or some other figure? This in my view is a serious question that needs to be asked and then answered, and in order to do that, one must look at their personal finances and spending habits.
In your every day life you have small, medium and large expenditures all of which fall into the categories of either tangible or intangible. For the most part, most of us have no problems with medium to large tangible expenses, such as house or car payments, or a new TV as these are things we can see or touch. Medium to large intangible expenses are much harder, such as a seminar or course fee where the results are not guaranteed. Small expenses on the other hand are a different breed altogether.
How often will you go and spend money on something small and intangible and think nothing much of the actual expense? An example would be some lunch on the go; where you buy some food and drink and know that the cost won’t change things much for you so you don’t concern yourself with it too much. But let’s say you get home that evening and decide you like the idea of eating out for dinner. Do you now think twice about where you will go and how much you are willing to spend? If so, you have a threshold on the amount of money you are willing to spend (as most of us do), especially on intangible items or items quickly consumed.
This threshold or level of expenditure where you change from not thinking to thinking twice is a perfect example of where your comfort zone currently sits when it comes to the value of money relative to you. Go over it and you get uncomfortable and have to think twice.
In trading, it will be no different. You will find it much easier to take losses where the amount, or ‘R’ factor, is under your threshold, than if it is over. I know many people will respond to this comment with the issue of, by risking so little it will take too long to make any decent amount of money or even the fact that brokerage costs etc will start to become a heavy burden, and these are fair responses. However, the fact of the matter is, the act of trading is not going to change the way your brain responds to such losses because there is nothing to show for the loss (intangible), and if the loss is out of your comfort zone then your brain is not going to like it.
What’s more, imagine you are sitting on a nice paper profit which is in excess of your threshold; an amount that if you were to spend on something intangible would cause you to think twice. Your brain is way out of its comfort zone because a) it’s a lot of money to you, and b) you can’t realize the profit and thus bank it until you actually close out the position! When you are in such a position all sorts of justifications for breaking your rules start flooding your mind.
Both of these instances of not being able to take losses well and cutting winners short are major hurdles traders face all the time and much of the issue lies in their personal relationship to money and the value they place on it. If you have a low relative value of money, it doesn’t matter what the system you use is or how well it performs for others; you are only able to extract from it what your relative value to money is. If you don’t believe me, check out the free e-book and video at this site www.reprogrammingthemind.com and see for yourself on how and why we behave the way we do with money.
You should spend some time assessing your spending habits and determine where your threshold lies. If it is too low to even consider making substantial money in the markets, then you are faced with the tough decision of either looking for a different career or changing your threshold level. Much of the problem lies in the belief that money is something we generally lack, and that there never quite seems to be enough. Unfortunately, it doesn’t matter which way you look at it, this is a fundamental issue for most people, and it is no wonder 95% of trader fail.
Once again, you should check out the free e-book and video at this site www.reprogrammingthemind.com and see for yourself on how and why we behave the way we do with money.
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Your major focus in trading should be the softer side of trading, the business and psychological side of it; the harder side which relates more to the technical side is a secondary thought, however in this article I am combining the two because one of my favourite patterns is an ideal pattern for the impatient trader who does not like to hold on to trades for too long.
Impatience is not a good trait to have in the markets when trading or investing. It breeds laziness when it comes to research, planning and analysis, it causes some to exit trades too early, and it causes other’s to constantly monitor their positions. To add to this, trades that linger on can incur costs such as time premium erosion for options traders, and interest costs for CFD traders or stock traders using margin, to name a couple.
Weaknesses are a part of human nature; your job is to ‘manage’ them, not to try and eliminate them or even turn them into strengths. We were brought up to take our weaknesses and try and turn them into strengths which I believe is the wrong approach. Build on your strengths and manage your weaknesses is the best motto I ever heard.
Some traders who don’t like to be in trades for too long will use an exit strategy that will force them out of the trade if the particular stock or market consolidates and moves sideways for a few days, which is a good strategy. Let’s look at an entry technique which is the trading pattern for the impatient trader.
This pattern signals a turning of the market. It does not necessarily signal a top or bottom, it will sometimes just signal a correction, either way; it tells you that a swift and sharp move the other way is imminent, and usually enough to give a good reward to risk. The emphasis here is ‘swift and sharp’, because this is what the impatient trader is looking for.
The pattern unfolds in 5 waves with the highs and lows of the waves overlapping each other to the point where the 5th wave ends in a spike. Here is a diagram showing what to expect at the end of a run up, and the end of a run down.
This is what you need to see and how to trade it:
1. You join the highs of wave 1 and 3 together, and the lows of wave 2 and 4 together if in an up market, and these lines need to converge [or lows of waves 1 and 3, and highs of waves 2 and 4 if in a down market].
2. You want the high of wave 5 to break the upper line and spike [low of wave 5 to break lower line and spike].
3. The break of the lower line is your entry [the break of upper line is your entry].
4. Your stop goes on the other side of the 5th wave.
5. You want your exit or your first profit target to be within the range between the low of wave 1 and wave 2.
6. You shouldn’t take the trade if this range does not offer you at least a reward to risk ratio of 1:1, however this is obviously a personal choice
This is an example that occurred on the SP500 index in July 2008 on a 30 minute chart.
Elliott Wave users will be familiar with this pattern, known as an ending, leading and 5th wave diagonal; others may know it as three drives pattern, and others may just say it’s a wedge pattern.
The point I wanted to make in this article, so as to benefit you is that when these patterns occur they produce swift and sharp moves and this is an obvious benefit to those who don’t like spending too much time in the markets, whether it’s due to being impatient or because of trading instruments that are time sensitive.
One is to tell the trader the open, low, high and closing price of that particular time period, and two, whether the close was higher (green bodied), or lower (red bodied) than the open.
However they can alert the trained eye to pending reversals offering the chance for a trader to get a head start on a possible new trend, or to alert the trader who is already in the markets that the trend is ending and to tighten stops or take profits now.
The two candlestick patterns we are demonstrating here is the hammer (& hangman), and the tweezers (also known as railway tracks).
When looking at either pattern, they look quite different, however when it comes to what is going on in the market place, the same thing is happening. So let’s see what that is.
After a significant run up in price, the market will exhaust itself or be overbought; however this is when the most action usually takes place. The reason is because towards the end of the trend, the misinformed public are still buying, not wanting to miss out on what is probably a well talked about market and trend. However at the same time, the professional traders are the ones selling to the misinformed public.
This activity creates a resistance to any higher prices because all the late buying is being absorbed by the professional selling. On a candlestick chart, this will often be shown by either a bearish pair of tweezers or a hangman. Essentially price moves up and then moves all the way back down again, in the space of one or two candles (see diagram below).
Likewise, after a significant move down the market will exhaust itself or be oversold; the misinformed public are the ones selling because they can’t handle their losses anymore, and the professionals are the ones buying from them.
Again, this activity creates support for price and the candlestick patterns will show price move down and then all the way back up again. This is shown by a bullish pair of tweezers or a hammer.
The bearish tweezers pattern and the hangman show the same activity, price moves up, and then moves back down roughly the equivalent amount. The bullish tweezers pattern and the hammer show the same, price moves down and then moves back up roughly the same distance.
If you look at the diagram below, you’ll see this in action. The main difference between the tweezers and the hangman or hammer is the time period. The tweezers are two candles, but the activity is the same. The other difference is that the colour of the hangman or hammers body is not relevant because the open and close are very close to each other.
Two things that make these candlestick patterns more powerful is when the range of the candles are longer than the average range, and there is higher than average volume to go with it.
Oscillators are great tools when used wisely. They offer many ways in which they can be used, divergence, over bought/over sold, crossovers to name a few.
They can also be used to get a feel for the markets, whether trending or in a range.
If a trader wants to use oscillators to get a feel for the markets, what they need is some recent price action and a belief that the current trend or range will continue long enough to create some more opportunities.
For example, if you believe you are in an uptrend, and the trend has quite a way to go, you can then use an oscillator such as the ‘stochastics oscillator’ to tell you how deep the corrections are likely to go, based on how the oscillator behaved recently.
All you need to do is adjust the oscillators variable until the indicator produces a repetitive signal and one that you feel you can use.
Take a look at the chart below.
This is a daily chart and what has been added is a stochastics with a 25,5,5 setting. The most important variable was the first number, 25. Not because 25 works better than any other number, but because for this market, during this trend, 25 offered simple triggers as to when the corrections were likely to end and the trend continue, as shown by the arrows.
All you do as the trader is determine what number gives you the best signals or triggers for a possible trade.
When in an uptrend, look to use the oscillator as a signal that a correction is ending, and not when the trend itself is ending. Likewise, in a downtrend, use the oscillator as a signal that a bear market rally is ending, and not the downtrend itself.
However, when in a ranging or sideways market, you can use the oscillator as a way to signal when the top and the bottom of the range have been made.
During trending markets you will always have corrections. They are an inevitable part of a trend, and as such provide excellent trading opportunities.
What’s more corrections can often appear as certain shapes and structures that can be seen quite easily to the trained eye, offering similar opportunities time and time again.
One of those familiar shapes or structures is an A-B-C pattern. The a-b-c pattern is quite common and as such has varying names depending on the theory or the analyst using it; however its characteristics are the same.
If you are in a trend, the a-b-c pattern will make 3 waves or swings, waves A and C will run counter to the trend, and wave B will run in the same direction as the trend. When the pattern is complete, the main trend will resume.
The a-b-c pattern is never picture perfect, even though traders would love it to be, but two common characteristics that make it easier to trade are the following:
1. Waves A and C will often appear similar in length.
2. The whole pattern will often run within a channel.
If you look at the chart below you can see a nice a-b-c pattern, following the characteristics just mentioned.
The trend is up, and then wave A swings down against the trend, wave B swings back up with the trend, finally wave C swings back down. Also, the lengths of waves A and C appear similar in length, and the whole pattern fits within a small channel.
You wont always see them appear in such a nice fashion, which can make them harder to trade, however when you do, they offer a great opportunity.
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