Narrow Range 7 (NR7) Breakout

Entry Logic

• Exact entry trigger: Buy on a candle closing above the high of the NR7 bar. Sell on a candle closing below the low of the NR7 bar. An NR7 bar is the bar with the narrowest range of the last 7 bars.
• Confirmation requirements: The breakout candle should have a volume of at least 150% of the 20-period moving average of volume.
• Timeframe required: 15-minute or 60-minute chart.
• Location context: The NR7 pattern should appear after a significant price move, indicating a pause or consolidation.
• Market condition requirement: A trending market that is temporarily consolidating.

Exit Logic

• Profit target(s): Target 1 at 2x the range of the NR7 bar. Target 2 at 4x the range of the NR7 bar.
• Scaling out rules: Exit 50% at Target 1. Trail the stop on the remaining position.
• Trailing stop rules: Use a trailing stop below the low of the previous candle for longs, and above the high for shorts.
• Exit on signal failure: If the breakout fails to gain momentum and reverses, exit the trade.
• Exit on opposite signal: An opposing NR7 breakout signal is an exit signal.
• Exit on time expiration: Close all positions by the end of the trading day.
• Exit on momentum loss: A divergence on a momentum oscillator can signal an exit.

Stop Loss Structure

• Hard stop location: Place the stop loss one tick below the low of the NR7 bar for a long, and one tick above the high for a short.
• Soft stop rules: Not applicable.
• Maximum dollar loss per trade: 1% of the trading account.
• Maximum percent loss per trade: 1%.
• Structural stop placement: The stop is placed at the opposite side of the NR7 bar.

Risk Management Framework

• Risk per trade: 0.5% of account equity.
• Maximum daily loss limit: 2% of account equity.
• Maximum weekly loss limit: 5% of account equity.
• Maximum drawdown allowed: 15%.
• Risk-reward ratio requirement: Minimum 2:1 reward-to-risk ratio.

Position Sizing Model

• Recommended sizing approach: Position size is determined by the stop loss distance and the account risk limit.
• Volatility-based adjustment: The narrow range of the NR7 bar allows for a larger position size for the same amount of risk.
• Conviction-based sizing: A+ setups get full size. B setups get half size.
• Scaling in rules: Do not scale into NR7 breakout trades.
• Scaling out rules: Scale out at predefined profit targets.

Trade Filtering

• Market conditions to avoid: Avoid trading NR7 breakouts in choppy, non-trending markets.
• Specific setups required: Look for NR7 patterns that form near key support or resistance levels.
• Stock/instrument requirements: High-volume stocks that are in a clear trend.
• Time of day restrictions: No specific time of day restrictions, but the pattern is more reliable during active market hours.
• Chop/news avoidance rules: Avoid trading around major news events.

Context Framework

• Trend direction assessment: The breakout should be in the direction of the prevailing trend.
• VWAP relationship: For long trades, price should be above VWAP. For short trades, below VWAP.
• Moving average relationship: The short-term moving averages should be aligned with the direction of the trade.
• Range location: The NR7 pattern should form after a period of expansion.
• Higher timeframe alignment: The direction of the breakout should align with the trend on the daily chart.

Trade Management Rules

• When to move stop to breakeven: Move the stop to breakeven after the first profit target is reached.
• When to scale out: At 2R and 4R.
• When to add size: Do not add to the position.
• How to handle fast moves vs slow moves: In fast-moving markets, trail the stop more aggressively.

Time Rules

• Optimal trading window: During the main trading session.
• Times to avoid: Avoid trading during low-volume periods.
• Session-specific notes: The pattern can be found in all trading sessions.

Setup Classification

• A+ setup criteria: NR7 breakout in the direction of a strong trend, with high volume confirmation.
• A setup criteria: NR7 breakout with good volume, but some minor divergences.
• B setup criteria: NR7 breakout on average volume.
• C setup criteria: Low-volume breakout against the trend. Avoid.

Market Selection Criteria

• Instrument requirements: Liquid stocks and ETFs.
• Volume/liquidity requirements: High average daily volume.
• Volatility requirements: The stock should have a good daily range.

Statistical Edge Metrics

• Expected win rate: 40-50%.
• Average win size: 3R.
• Average loss size: 1R.
• Profit factor: 1.5 - 2.0.
• Expectancy per trade: Positive.

Failure Conditions

• Market conditions where strategy fails: Fails in choppy, sideways markets.
• Specific scenarios to avoid: Avoid breakouts that occur on low volume.

Psychological Rules

• Key mental discipline requirements: Requires patience to wait for the pattern to form and the discipline to act on the breakout.

Advanced Components

• Market regime detection: Use a filter to identify trending markets.
• Volatility/liquidity filters: Apply volume and volatility filters.
• Correlation filters: Be aware of market correlations.
• Multi-timeframe alignment: The breakout should be in the direction of the higher timeframe trend.

Location

• Where this setup is strongest: In strongly trending markets, after a brief consolidation.
• Where this setup is weakest: In range-bound markets.
• Location changes outcome: An NR7 pattern at a key support or resistance level is a stronger signal.