Narrow Range 4 (NR4) Breakout

Entry Logic

• Exact entry trigger: Buy on a close above the high of the NR4 bar. An NR4 bar is the bar with the narrowest range in the last four bars. Sell on a close below the low of the NR4 bar.
• Confirmation requirements: Breakout volume should be at least 1.5 times the 20-period average volume.
• Timeframe required: 15-minute or 30-minute chart.
• Location context: The NR4 pattern should form after a period of range expansion, signaling a pause.
• Market condition requirement: A trending market that is taking a brief rest.

Exit Logic

• Profit target(s): First target at 2 times the NR4 bar's range. Second target at 4 times the NR4 bar's range.
• Scaling out rules: Exit 50% at the first target. Trail the remaining half.
• Trailing stop rules: Use a trailing stop below the low of the prior candle for long positions, and above the high for short positions.
• Exit on signal failure: If the breakout candle is immediately engulfed by a reversal candle, exit the trade.
• Exit on opposite signal: An opposing NR4 breakout signal is a valid exit signal.
• Exit on time expiration: Close all positions before the end of the trading day.
• Exit on momentum loss: A bearish divergence on a momentum indicator like the RSI can be used as an exit signal for a long trade.

Stop Loss Structure

• Hard stop location: Place the stop loss one tick below the low of the NR4 bar for a long trade, and one tick above the high for a short trade.
• Soft stop rules: Not used. A hard stop is mandatory.
• Maximum dollar loss per trade: Limited to 0.75% of the trading account.
• Maximum percent loss per trade: 0.75%.
• Structural stop placement: The stop is placed at the opposite end of the NR4 bar's range.

Risk Management Framework

• Risk per trade: Risk no more than 0.5% of account equity on any single trade.
• Maximum daily loss limit: 1.5% of the account. Stop trading if this limit is reached.
• Maximum weekly loss limit: 4% of the account.
• Maximum drawdown allowed: 15% from the account's peak.
• Risk-reward ratio requirement: A minimum 2:1 reward-to-risk ratio is required.

Position Sizing Model

• Recommended sizing approach: Position size is calculated based on the stop loss distance and the account risk limit.
• Volatility-based adjustment: The small range of the NR4 bar allows for a larger position size for the same dollar risk.
• Conviction-based sizing: A+ setups receive full size. B setups receive half size. C setups are avoided.
• Scaling in rules: Do not scale into NR4 breakout trades.
• Scaling out rules: Scale out at predefined profit targets.

Trade Filtering

• Market conditions to avoid: Avoid trading this pattern in choppy, sideways markets.
• Specific setups required: Look for NR4 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: The pattern is more reliable during the first half of the trading day.
• Chop/news avoidance rules: Do not trade around major news releases.

Context Framework

• Trend direction assessment: The breakout should be in the direction of the prevailing trend.
• VWAP relationship: For long trades, the 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 NR4 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: The first four hours of the trading session.
• Times to avoid: Avoid trading during the lunch hour and the last hour of the day.
• Session-specific notes: The pattern can be found in all trading sessions.

Setup Classification

• A+ setup criteria: NR4 breakout in the direction of a strong trend, with high volume confirmation.
• A setup criteria: NR4 breakout with good volume, but some minor divergences.
• B setup criteria: NR4 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: 45-55%.
• Average win size: 2.5R.
• 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 NR4 pattern at a key support or resistance level is a stronger signal.