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.
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.
Do you use the MACD or even moving average crossovers as a way to determine the overall trend in your analysis? One thing you may have come across in the past is that although these are great methods, they always produce drawdown periods for you when the market is correcting or consolidating, and sometimes these periods can last for months.
One way to eliminate or reduce the effects of these consolidation periods is to ‘clip the trend’, and here we’ll demonstrate how to do this using the MACD indicator.
If you are in an uptrend, when the leading MACD line crosses below the trigger line, the uptrend is now clipped, leaving you with a decision to either not trade this market, or to look for shorts. Once the leading line crosses back above the trigger line, you can once again trade this market or now look for longs.
Likewise; if you are in a downtrend, when the leading MACD line crosses above the trigger line, the downtrend is now clipped, leaving you with the decision to either stay out of this market or look for longs. Once the leading line crosses back below the trigger line, you can once again trade this market or now look for shorts.
On the chart below, we have an up trending market which is being shown by both the MACD being above zero (one method for determining a trend), and a moving average crossover, where the short mav is above the long mav (the red line above the green line on the upper part of the chart).
The black arrows are showing you where the trend is being ‘clipped’ by the action of the MACD crossover (leading red line crosses below green trigger line), and as you can see on all occasions, a consolidation period forms, which is not ideal for a trader wanting to trade the trend.
The red circles are demonstrating when the leading MACD line crosses back above the trigger line and where the trend once again resumes.
The MACD Histogram is a great tool that can alert you to possible tops or bottoms.
On occasions the MACD itself may be following the price nicely but the Histogram can be diverging, telling the trained eye to look out for a turn in price.
The MACD Histogram is the difference between both MACD lines, and as such if it is weakening (diverging) even though price is still advancing (making higher highs) or falling (making lower lows), it can suggest the move is running out of steam.
Taking a look at the chart posted below, we can see two examples when the MACD has not diverged with price but the Histogram has, and on both occasions, price has turned the other way.
If you use or are planning on using MACD in your technical analysis, then do look out for what the Histogram is doing too, and add it to your trading tool box.
All professions whether it be sport, business, or trading have what are called the basics and if you’re starting out in a new profession, the basics form the foundation or the core. However if you’ve been practicing your profession for quite some time and feel you’ve gone off track or are not hitting your goals, usually the best thing to do is just get back to the basics: and trading is no different.
This is not an article based on emotional discipline or psychology, it is based on the basics of a trading plan, and it really doesn’t matter if you’re long term or short term, the basics apply to most market participants. Some may have trading plans that are quite different to the basics however for the majority who are relatively new to trading or are struggling, the basics are by far the best approach to adopt.
The basics are split into three and are:
1. Determine the trend
2. Wait for a pullback
3. Enter on an event or pattern
1. Determining the trend can be a discretionary or mechanical decision. For example, a lot of traders can pull up a chart and instantly determine it’s going up, down, or it’s sideways and choppy, and if it’s the latter it is best left alone; this is a discretionary approach.
For other’s they need some tools to make that decision for them such as moving averages, MACD or trend lines to name a few. All have their pluses and minuses and it usually helps to use a couple of tools or to add some discretion.
I’ll give you an example of a completely mechanical approach to determining a trend.
Set up a 200 day simple moving average (200 SMA) on your chart. Also add the indicator ATR (average true range) and set it to 100. If you take the current 200 SMA reading and the reading from 50 days ago, the difference needs to be greater than 4 times the current ATR(100) reading.
For example, if the current 200 SMA reading is 60 and the reading from 50 days ago is 50, that’s a difference of 10. If the current ATR(100) reading is 2, multiplying it by 4 gives you 8, and as such means you are in a mechanical uptrend. The opposite applies to down trends or bear markets.
2. Waiting for a pullback simply allows you to get on board a trend at a cheaper price. It can become somewhat of an issue for many as it’s hard to time when the pullback has ended or to determine if indeed the trend will continue. It could end up being that the trend has ended.
Keeping it simple is the best policy. Oscillating indicators are great tools for this very purpose, such as Stochastic or RSI to name a couple. Oscillators such as these have what are called over-bought and over-sold zones which you should become familiar with. When in an uptrend, a pullback in price coupled with an over-sold reading on your indicator is telling you it may be time to look for a possible trade to go long.
Using an RSI (14) is a popular method for determining if a pullback is over-sold when it reaches or goes below the 30 level.
Many will want more than just one indicator and will prefer a confluence of events to occur. Other tools will include trend lines, Bollinger bands, old support and resistance levels, volume, Fibonacci levels and so on. My suggestion is to just pull up some charts and look at what pull-back cause your indicators to do regularly. It doesn’t have to be all the time, but if it does it enough, you have your tools for measuring a pullback.
3. Entering your trade should probably be the most mechanical of the three basics. The reason is because it is the point where emotions can run high and traders can get twitchy. It’s also a time when someone will start to question whether they have the first two basics right.
If you have determined that the trend is up, and a pullback has occurred you’ll need a way to get in and this is best done by waiting for some event or pattern.
Events can be that price has exceeded a certain number of price bars, or it crosses over a short moving average. If the pullback made lower highs and lower lows, you could wait for a higher low to be made which could signal that the pullback is over and enter after a break of the most recent high.
Once again, by looking at a few charts you can get a feel for what could work and what wouldn’t.
A simple and popular method is to wait for price to close higher than the previous 3 bars. In other words, the closing price of the current price bar must be higher than the 3 previous bars highs.
So there you have what I call the three basics of a trading plan or system however it is not the complete picture. It’s ok to get into the market but how do you get out? And it is this part of trading that I believe goes beyond the basics because everyone is different. Different goals, different risk profile and tolerance levels, different resources such as time and capital and so on. Because of this, an exit strategy needs to center around the trader themselves.
Exercise:
If you feel the basics I have just spoken about make sense to you, then look for ways to determine each of the three steps based on your preferred method of trading (mechanical, discretionary, technical, fundamental or a combination).
Use the members area, search on forums, seach on Google and ask other traders.
Claire asked me to clarify the use of trailing stops in the 4T’s system. I think this is a great chance to demonstrate the uses of exits as they are more dimensional than most realize.
In the 4T’s system I use a trailing stop that moves up (I am referring to longs - just think opposite for shorts), every time a new low forms. As I am using an ‘isolation low’ as my point of reference (after a trigger has taken place), to look for a trade, I suggest using the same when trailing the stops. The reason is because if you are looking for isolation lows after a trigger, you’ll become more familiar with the pattern, and thus making it easier to spot them during the trade to trail your stops.
Mark asked me, “If I wanted to use the 4T’s system or any system like it and add Elliott Wave to it or fibonacci, then how am I supposed to back test it to determine my average profit etc.”
That’s a great question and the simple answer is you can’t. Well not technically anyway. A lot of the attraction to mechanical systems is that they are easy to back test, not only because there’s no decision making, but also because you can just plug a system into a piece of software and presto!
But there are several ways in which you can test a discretionary system.
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