If you are a Price Action believer who loves simplicity in trading, the NR4 pattern deserves to be the only strategy you choose to make money. In addition to its ease of use, its effectiveness is something you must be surprised when it can bring regular weekly, monthly, and yearly profits to your account. Now let’s explore the fun of this special way of trading.
What is the NR4 pattern?
“NR” stands for “narrow range”. The number “4” means the last candle in the last 4 candles and has a smaller amplitude than the previous 3 ones. This pattern was introduced in the book Day Trading with Short Term Price Patterns & Opening Range Breakout by Toby Crabel and is very popular among short-term traders.
The meaning behind the NR4 pattern is quite similar to Bollinger Bands. It is a narrow price movement that heralds a sharp rally or decline.
NR4 upside breakout pattern
The NR4 upside breakout pattern appears after the downtrend and the narrow 4th candle creates an accumulation area. Once again, the price opens in the range of the 4th candle. Then the price goes up to break the top of the 4th candle, indicating that the market is bullish.
NR4 downside breakout pattern
The NR4 downside breakout pattern shows a bearish signal when the 5th-day candle falls to the low of the 4th candle.
NR4 pattern identification features
This pattern will have the following notable features.
– The first 3 candles are bullish or bearish with a long body
– The 4th candle has an extremely short body, indicating the accumulation of the market. If it has the same color as the previous 3 candles, the higher the reliability.
– The 5th candle will open inside the 4th candle. Then it will break to the high of the 4th candle which is a sign of future price increases. On the contrary, if the price breaks to the low of the 4th candle, the high probability that the price will fall.
How to trade with the NR4 pattern
In this article, the timeframe used for the NR4 trading strategy is H1. The trading steps according to this strategy are as follows.
Step 1: Wait for the pattern to appear.
Step 2: Open a bullish order if the price breaks the high of the 4th candle in the NR4 pattern. Or place a bearish order if the price breaks the low of the 4th candle. Traders can place a buy stop order just above the top of the NR4 candle. Add a sell stop order right below the bottom of either of these two candles to not miss the opportunity. As soon as one of the two orders is filled, you can cancel the other.
Step 3: Place a stop-loss just below the low of the 4th candle with a bullish order.
Or place a stop-loss right on top of the 4th candle with a bearish order.
Take profits at the next levels such as support/resistance, trendline, Fibonacci… Or follow the lowest fixed risk/reward ratio of 1:2 for example. In addition, traders can also set up trailing stops manually or based on other indicators.
Note when using this pattern
When trading with this pattern, you need to note the following things.
- The NR4 pattern predicts the short-term volatility of the market. Therefore, if after a trader enters an order or a pending order is filled, the price does not soon move in a favorable direction, the probability of failure is quite high.
- In addition to NR4, long-term traders can increase the number of candles to count up to NR10 or NR20.
- A trend following indicator along with an overbought/oversold indicator can help a trader strengthen the credibility of a trading signal with this pattern.
- NR4 represents a short-term accumulation and breakout. This can be called a break between the two sides, selling and buying.
- There are times when the pattern is formed as a cluster of 2, 3, or 5 candles. That shows that the accumulation is not enough or prolonged leading to a failed pattern.
It is difficult to predict the direction of the breakout before it occurs. However, based on the main trend, price pattern, or signal from a technical indicator, traders can determine whether to prioritize buy or sell orders.
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