lnangia / SH,
Just to add my views on NRx.
1) 1 day of narrow range move indicates price equilibirium where demand and supply are met within narrow range. It could be that there is very low demand and very low supply.. (lack of participation of biggies and waiting for some trigger).
NRx is just simple and easy approach to identify such balance, lack of interest area in the market.
And we know that mkt can't be in such situation for long.. It is just matter of time that demand/supply will get in imbalance resulting in breakout.. and range expansion.
As a trader, don't we enjoy expanding, wide range market ? And NRx just helps us in getting ready for that.
You can use many other appoaches to indentify that.. but think of this simplicity when u don't have to depend on tools like TA package, or excel sheet but just simple H-L and < or > knowledge is sufficient to identify such situation.
SH - as u have mentioned about comparing 2 different lookback period of ATRs to come to decision.. IMO, NR7 uses 2 different period.. longer period is 7 bars, and shorter is 1 bar. As I have mentioned at other places, I also use 10 bars average range and compare today's range against that to form my view about consolidation. Once can also support the analysis for bringing weekly NRx scenario here.
lnangia - I agree with your explanation on why we take 7 as magic number here. If we take lower then 7, then we might have higher frequency of such bars, but then the signal's reliabiltiy goes down. If we take higher number then signal becomes to rare.
As per my stats - NR4 occurs approx 24% of the time, whereas NR7 is about approx 15%of the time that indicates, roughly 2 to 3 occurance in a month.
On longer timeframe, I reduce the lookback period.. So while looking for contraction on weekly chart, I use NR4... Infact our current week with range of 100 points is developing to be the narrowest week of last 1 year.. ofcourse range can increase in next 2 days.
The credit of this approach goes to Toby Crable. He has tested it across various markets and commodities and found favourable results.
As Sunil has mentioned, when we have Inside Day coupled with NR, the breakout has great potential.
Hope this helps.
