You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Classic Geometric Patterns and Narrow Range Setups
- Thread starter inandlong
- Start date
This is a stock that came up on my scan. There are some pluses and minuses to it, but let the market, specifically volume, give you the clue as to what to do.
If you look back on this chart alone, you'll see this pattern repeated, followed by some nice moves. Although it appears I have drawn a simple rising wedge, the scan is actually for NR7/ID's with a low near term historical volatility. Essentially, these criteria quantify the triangles, wedges, pennants, and flags.
It is a fact that volatility cycles. And it is a fact that stocks trend and consolidate. Combining the two facts produces this setup.
If you look back on this chart alone, you'll see this pattern repeated, followed by some nice moves. Although it appears I have drawn a simple rising wedge, the scan is actually for NR7/ID's with a low near term historical volatility. Essentially, these criteria quantify the triangles, wedges, pennants, and flags.
It is a fact that volatility cycles. And it is a fact that stocks trend and consolidate. Combining the two facts produces this setup.
Attachments
Post from Traderkay:
in, so would you trade that whichever way it breaks or only to the long side? i also presume that it's 200MA this baby crossed not so long ago and its fixing to do a cross with 50MA. so i guess trend is up. where would your triggers be? where would your stops be? where would your targets be? i have a general idea but would like to hear (I mean see on a chart) your specifics. Thanks
in, so would you trade that whichever way it breaks or only to the long side? i also presume that it's 200MA this baby crossed not so long ago and its fixing to do a cross with 50MA. so i guess trend is up. where would your triggers be? where would your stops be? where would your targets be? i have a general idea but would like to hear (I mean see on a chart) your specifics. Thanks
Post from inandlong:
T'kay you have it dead right, trade either way it breaks, as long as there is a substantial volume increase. That is the clue I mentioned before. Typically the break will go for 1-3 days on much higher volume, then pause or pullback on much lower volume. An alternative to trading the first break is waiting for that pullback.
Right again, that red line is the Mac Daddy 200 day sma. I use the 40 sma instead of the 50, just preference really, so that is the blue line. Your plan to trade in the direction of the trend is the best way to go, but that is too much like smart for me so I'd trade it either way.
More importantly though, I drew the pattern just to help visualize the setup. The real play here is not the break of the triangle, but the break of today's high or low... tomorrow. The beauty of the Narrow Range Inside Day trade is, by definition, the risk will be small because of the inside day. If you wanted to trade this from the long side only because of the moving averages, and the price breaks out from today's high tomorrow, then your stoploss should be 7-10 cents - 1 tick- below the low of today.
I have to leave for soccer right now, when I get back I'll post a chart that better describes the setup.
Btw, Tony Crabel is first credited with describing this setup, and Larry Connors and Linda Raschke added the volatility part. It is mention in several books and I know that both Connors and Raschke continue to include it in their pay services. I mention this because if someone is trying to get and keep business, they don't put out things that don't work.
Back in a bit.
T'kay you have it dead right, trade either way it breaks, as long as there is a substantial volume increase. That is the clue I mentioned before. Typically the break will go for 1-3 days on much higher volume, then pause or pullback on much lower volume. An alternative to trading the first break is waiting for that pullback.
Right again, that red line is the Mac Daddy 200 day sma. I use the 40 sma instead of the 50, just preference really, so that is the blue line. Your plan to trade in the direction of the trend is the best way to go, but that is too much like smart for me so I'd trade it either way.
More importantly though, I drew the pattern just to help visualize the setup. The real play here is not the break of the triangle, but the break of today's high or low... tomorrow. The beauty of the Narrow Range Inside Day trade is, by definition, the risk will be small because of the inside day. If you wanted to trade this from the long side only because of the moving averages, and the price breaks out from today's high tomorrow, then your stoploss should be 7-10 cents - 1 tick- below the low of today.
I have to leave for soccer right now, when I get back I'll post a chart that better describes the setup.
Btw, Tony Crabel is first credited with describing this setup, and Larry Connors and Linda Raschke added the volatility part. It is mention in several books and I know that both Connors and Raschke continue to include it in their pay services. I mention this because if someone is trying to get and keep business, they don't put out things that don't work.
Back in a bit.
Post from inandlong:
The chart from my previous post no longer qualifies as an NR7ID setup. The setup is actually scanned for EOD by definition. But I will provide a chart showing this setup in the post after this.
How to draw the pattern can be fairly subjective. I can just as easily draw a wedge and justify it as I can an ascending triangle, which I have drawn. But inspection shows that the highs of today and yesterday did not take out the close from the local high several days ago, so a horizontal line is drawn there.
The process isn't exact, nor is it meant to be. It is meant to provide a gross visualization of price activity. Larry Williams has been quoted as saying something to the effect of, "it's lucky for me I have a dull pencil."
I like to use closing prices versus intraday prices when trading breaks from these patterns. Sure I might miss a few cents, but I won't get faked out intraday either. So a close outside the pattern is a go..... when it is accompanied by strong volume.
The classic break - classic meaning that which is described by Edwards and Magee - occurs 1/2 - 2/3 of the way thru the pattern. The farther into the apex the price goes, the less likely there will be an easily recognized break.
An ascending triangle has been shown to be a continuation pattern. However, if the price breaks down instead of out, it doesn't really matter.
What does matter is that a period of consolidation has been identified, and the trader is prepared to take advantage of the next trending move, whichever way it goes.
The chart from my previous post no longer qualifies as an NR7ID setup. The setup is actually scanned for EOD by definition. But I will provide a chart showing this setup in the post after this.
How to draw the pattern can be fairly subjective. I can just as easily draw a wedge and justify it as I can an ascending triangle, which I have drawn. But inspection shows that the highs of today and yesterday did not take out the close from the local high several days ago, so a horizontal line is drawn there.
The process isn't exact, nor is it meant to be. It is meant to provide a gross visualization of price activity. Larry Williams has been quoted as saying something to the effect of, "it's lucky for me I have a dull pencil."
I like to use closing prices versus intraday prices when trading breaks from these patterns. Sure I might miss a few cents, but I won't get faked out intraday either. So a close outside the pattern is a go..... when it is accompanied by strong volume.
The classic break - classic meaning that which is described by Edwards and Magee - occurs 1/2 - 2/3 of the way thru the pattern. The farther into the apex the price goes, the less likely there will be an easily recognized break.
An ascending triangle has been shown to be a continuation pattern. However, if the price breaks down instead of out, it doesn't really matter.
What does matter is that a period of consolidation has been identified, and the trader is prepared to take advantage of the next trending move, whichever way it goes.
Post from inandlong:
here is one that occured Monday. The symbol is CLE Claires Store Inc. BJ looks very similar so both can be studied as very nice examples of the NR7ID at work. BJ is BJ's Wholesale Club, so I guess there was some retail thing going on. LTD and TGT were also on the list but they were victims of the nemesis of this setup, the outside day. And yet, there is a positive to that too.
Take a look at the CLE chart. Starting from the left, there is a violet line beneath an NR4ID. The NR4 is another "popular" range, so you can expect it to work too. The real deal though is that it is an inside day, which manifests compressed volatility.
The brown line is just beneath an inside day.
The two blue lines indicate NR7ID's. The volatility was not as low for the second one as it was the first, but in both cases there is some sideways action prior to the next move.
This trade is intended to be a 1-4 day trade using trailing stops. I have rarely traded this setup per se, but have looked at it on and off for years. I am presently working it in to my trading plan.
The nemesis of this setup is the outside day. But, the beauty of this setup is that even an outside day can be profitable. The proper way to trade this setup is to have a stop and reverse order in at the opposite extreme from your entry. The narrowness of the narrow range day makes the loss very reasonable, and many times the reverse negates the loss, or very nearly does so.
One way to filter the trades is to determine the limit of risk you are willing to accept, and take only those trades that are within that limit. Another way is to take only those trades that are in the same direction as the prevailing trend.
The profit target on these types of trades should be consistent with the reward: risk ratio you select. The minimum acceptable is 1:1, so if the length of the ID bar is .50, then the profit target is at least .50.
here is one that occured Monday. The symbol is CLE Claires Store Inc. BJ looks very similar so both can be studied as very nice examples of the NR7ID at work. BJ is BJ's Wholesale Club, so I guess there was some retail thing going on. LTD and TGT were also on the list but they were victims of the nemesis of this setup, the outside day. And yet, there is a positive to that too.
Take a look at the CLE chart. Starting from the left, there is a violet line beneath an NR4ID. The NR4 is another "popular" range, so you can expect it to work too. The real deal though is that it is an inside day, which manifests compressed volatility.
The brown line is just beneath an inside day.
The two blue lines indicate NR7ID's. The volatility was not as low for the second one as it was the first, but in both cases there is some sideways action prior to the next move.
This trade is intended to be a 1-4 day trade using trailing stops. I have rarely traded this setup per se, but have looked at it on and off for years. I am presently working it in to my trading plan.
The nemesis of this setup is the outside day. But, the beauty of this setup is that even an outside day can be profitable. The proper way to trade this setup is to have a stop and reverse order in at the opposite extreme from your entry. The narrowness of the narrow range day makes the loss very reasonable, and many times the reverse negates the loss, or very nearly does so.
One way to filter the trades is to determine the limit of risk you are willing to accept, and take only those trades that are within that limit. Another way is to take only those trades that are in the same direction as the prevailing trend.
The profit target on these types of trades should be consistent with the reward: risk ratio you select. The minimum acceptable is 1:1, so if the length of the ID bar is .50, then the profit target is at least .50.
Attachments
Post from Salzburg:
inandlong,
You described your scan as "NR7/ID's with a low near term historical volatility." Does that mean you additionally require the NR7/ID to set up against a backdrop of low hisvol? In other words, is low hisvol a third component of your scan? If so, what are you using to determine low hisvol?
Or are you simply saying that NR7 means low near term hisvol?
inandlong,
You described your scan as "NR7/ID's with a low near term historical volatility." Does that mean you additionally require the NR7/ID to set up against a backdrop of low hisvol? In other words, is low hisvol a third component of your scan? If so, what are you using to determine low hisvol?
Or are you simply saying that NR7 means low near term hisvol?
Post from Traderkay:
--------------------------------------------------------------------------------
Quote from inandlong:
I like to use closing prices versus intraday prices when trading breaks from these patterns. Sure I might miss a few cents, but I won't get faked out intraday either. So a close outside the pattern is a go..... when it is accompanied by strong volume.
--------------------------------------------------------------------------------
OK very interesting. Because I wanted to say NR7 bars are very often whipsawed both ways by an outside bar. I've seen it quite a few times the hard way. Probably requiring a close will filter some of that.
--------------------------------------------------------------------------------
Quote from inandlong:
I like to use closing prices versus intraday prices when trading breaks from these patterns. Sure I might miss a few cents, but I won't get faked out intraday either. So a close outside the pattern is a go..... when it is accompanied by strong volume.
--------------------------------------------------------------------------------
OK very interesting. Because I wanted to say NR7 bars are very often whipsawed both ways by an outside bar. I've seen it quite a few times the hard way. Probably requiring a close will filter some of that.
Post from inandlong:
T'kay, the close outside the pattern is for the triangle stuff, and not the NR stuff. But, since the trade is supposed to be a 1-4 day trade using trailing stops, your idea is an excellent way to prevent damage from the outside day. You make an observation that I haven't yet, when you say that very often the NR7 trade subject to the outside day. When I describe this setup to others, I always say that even though the outside day is the nemesis, looking at charts reveals that there are not that many outside days. I have not done any statistical run on it, and won't, that makes it too much like work.
But, I am going to do this for the rest of the month, and it is because of your observation, and that Mon or Tues of this week there were a ton of outside days, consistent with the broad market action: every day there are about 100 or so of these trades between the NYSE and NAS using the volume and price limits I have selected, which are average vol 400K and price between 10 and 70. So for the rest of the month I will try to keep track of the total number of executions that would occur, and the number of outside days that occured too. I think it is a good study, and while only two weeks in duration, might give us a clue.
Oh yeah, for me the entry is 1 tick, or 7-10 cents beyond the H/L of the previous day. And I have always looked at this as somewhat of a scalper play, ie., hit it with size and take the 30 cents when you get it. Only recently have I learned that it is designed to be a 1-4 day play. Also, I think knowing the ATR is a good thing. It makes sense that if we are trying to catch breaks, we'd like it to have some spring to it. IE., if the ATR is .5 and our ID is .3, we won't be looking at much profit potential. I am just reasoning here, so I might be wrong. On the other hand, if the ATR is 1.5-2 and our ID is .5 or so, ...etc.
T'kay, the close outside the pattern is for the triangle stuff, and not the NR stuff. But, since the trade is supposed to be a 1-4 day trade using trailing stops, your idea is an excellent way to prevent damage from the outside day. You make an observation that I haven't yet, when you say that very often the NR7 trade subject to the outside day. When I describe this setup to others, I always say that even though the outside day is the nemesis, looking at charts reveals that there are not that many outside days. I have not done any statistical run on it, and won't, that makes it too much like work.
But, I am going to do this for the rest of the month, and it is because of your observation, and that Mon or Tues of this week there were a ton of outside days, consistent with the broad market action: every day there are about 100 or so of these trades between the NYSE and NAS using the volume and price limits I have selected, which are average vol 400K and price between 10 and 70. So for the rest of the month I will try to keep track of the total number of executions that would occur, and the number of outside days that occured too. I think it is a good study, and while only two weeks in duration, might give us a clue.
Oh yeah, for me the entry is 1 tick, or 7-10 cents beyond the H/L of the previous day. And I have always looked at this as somewhat of a scalper play, ie., hit it with size and take the 30 cents when you get it. Only recently have I learned that it is designed to be a 1-4 day play. Also, I think knowing the ATR is a good thing. It makes sense that if we are trying to catch breaks, we'd like it to have some spring to it. IE., if the ATR is .5 and our ID is .3, we won't be looking at much profit potential. I am just reasoning here, so I might be wrong. On the other hand, if the ATR is 1.5-2 and our ID is .5 or so, ...etc.
Post from inandlong:
Salzburg
Crabel is credited with describing the NR7/ID setup. Connors added the Historical Volatility Ratio to it. I know you have seen a stock run 3-4 days with big bars and then stop for a day with an inside day. By adding the low volatility component, Connors is requiring that not only was today a compressed volatility day, but the near term period has been too. The ratio part compares the volatility of the previous six days to the last 100 days... I think it is 100, it has been so long since I coded it that I forget. He also uses the last 10 days too. Optimally, I recall his ratio limit as being .6 or less.
As I would run stocks thru this setup on a spreadsheet, when one would qualify on all parameters, the consolidations patterns would be what I would end up seeing on the charts when I then looked at the chart. That is what made me conclude that this setup essentially quantifies the patterns that Edwards and Magee described. Of course it is not always the case, but you'd be surprised how many times you see these classic patterns.
One more thing I am currently looking at, and again for me it is as a scalper type trade. I am not a scalper, but catching these breaks seems to make sense if I am waiting for them to occur.
I am looking at scanning for the last two days to be inside days. You see this pattern all the time, usually historically, and you see those neat little 3 bar triangles then boom a nice break for the day. Well this pattern is just the same thing but in a sense less stringent requirements. I am not using the volatility thing on it. Or the 4 or 7 day req either. Actually, of those 100 or so I mentioned in the previous post, not many of those qualify using the volatility thing. But, of the ones that are in some type of consolidation, those seem to work better.
There are ways I am studying now that probably will reduce the number of candidates and increase the win ratio. T'kay's idea thought about trading with the trend... always a good thing... is sharp. I like the idea of requiring the inside day to be a smaller percentage of the ATR, or at least limiting the size of the inside day I am will to trade off of. Hey, after a 1.25 day, an 80 cent inside day is a candidate, but too big for me. I am not willing to accept an 80 cent end-to-end risk for this trade.
Salzburg
Crabel is credited with describing the NR7/ID setup. Connors added the Historical Volatility Ratio to it. I know you have seen a stock run 3-4 days with big bars and then stop for a day with an inside day. By adding the low volatility component, Connors is requiring that not only was today a compressed volatility day, but the near term period has been too. The ratio part compares the volatility of the previous six days to the last 100 days... I think it is 100, it has been so long since I coded it that I forget. He also uses the last 10 days too. Optimally, I recall his ratio limit as being .6 or less.
As I would run stocks thru this setup on a spreadsheet, when one would qualify on all parameters, the consolidations patterns would be what I would end up seeing on the charts when I then looked at the chart. That is what made me conclude that this setup essentially quantifies the patterns that Edwards and Magee described. Of course it is not always the case, but you'd be surprised how many times you see these classic patterns.
One more thing I am currently looking at, and again for me it is as a scalper type trade. I am not a scalper, but catching these breaks seems to make sense if I am waiting for them to occur.
I am looking at scanning for the last two days to be inside days. You see this pattern all the time, usually historically, and you see those neat little 3 bar triangles then boom a nice break for the day. Well this pattern is just the same thing but in a sense less stringent requirements. I am not using the volatility thing on it. Or the 4 or 7 day req either. Actually, of those 100 or so I mentioned in the previous post, not many of those qualify using the volatility thing. But, of the ones that are in some type of consolidation, those seem to work better.
There are ways I am studying now that probably will reduce the number of candidates and increase the win ratio. T'kay's idea thought about trading with the trend... always a good thing... is sharp. I like the idea of requiring the inside day to be a smaller percentage of the ATR, or at least limiting the size of the inside day I am will to trade off of. Hey, after a 1.25 day, an 80 cent inside day is a candidate, but too big for me. I am not willing to accept an 80 cent end-to-end risk for this trade.