There is nothing certain about financial markets. The only thing predictable is that periods of price consolidation are invariably followed by periods of price expansion, and vice versa. From here, the Volatility Squeeze system unfolds. There are numerous technical tools like Bollinger Bands and Average Directional Index that can help identify when markets are ranging. But most of them lag price, resulting in delayed signals.
A simple strategy for beginner traders to spot cryptocurrency markets that are stuck within a tight range is by utilizing the revolutionary new concept of “Narrow Range (NR) 7.” The idea was first propounded in 1990 by Toby Crabel through his book, “Day Trading with Short Term Price Patterns.” Narrow range bars or candles regularly precede powerful price moves. Thus by honing in on one, we can stay one step ahead of the crowd.
What is NR7?
Toby Crabel defined NR7 as a bar that has a smaller high-low range than the six bars before it. Actionable NR7 setups usually appear following a decisive up or down move. The NR7 points to a contraction in volatility as market participants choose to move to the sidelines awaiting a signal of either a reversal or continuation of the existing trend. Once a price consolidation has been located, traders can switch to a lower time frame chart to pinpoint precise trade entry and exit points.
Underlying Asset: Any major cryptocurrency pair
Chart Type: Candlestick
Time-frames: 15 minutes, 3 minutes
Long Entry Rules
- We first look at the 15 minute chart to detect a NR7 bar. The colour of the candlestick is not important. The best NR7 setups are “Doji” patterns, where the opening and closing prices are equal.
- We next switch to the 3 minute time frame to wait for a convincing close above the high of the NR7 candle. This in itself can be treated as a buy signal. But to stack the odds even more in our favour, we wait for a break above the last major pivot or reaction high on significant volumes.
- Traders need to note that since NR7 is typically a short-term market play, the trade needs to immediately move in our direction. Failure to do so is the first sign of a false move.
When all of the above three conditions have been met, we initiate a long position and place a protective stop-loss just below the low of the NR7 candlestick.
Long Exit Rules
- Once the trade turns profitable, we look to exit half of the position when the low of the previous five bars is breached.
- We tightly trail stop the remainder of the position, and exit completely if the low of the prior bar is taken out.
Cryptocurrency Trading Example: ETHUSD
Short Entry Rules
- We start out by looking at the 15 minute chart to spot a NR7 bar. The candlestick colour is not important, as long as the real body is not too large.
- We then switch to the 3 minute window to wait for a close below the low of the NR7 candle. This in itself can be treated as a sell signal. Traders seeking further confirmation can wait for the break of the last major pivot low.
- It is important to note that since NR7 is a short term price pattern, the trade needs to start working immediately. Failure to do so often results in a false move.
When all of the above three conditions are met, we enter in to a short trade and place a protective stop-loss just above the high of the NR7 candle.
Short Exit Rules
- We cover half of the position when the high of the prior five candles is broken.
- We tightly trail stop the remaining, and pull-out completely if the high of the previous bar is knocked out.
Cryptocurrency Trading Example: BTCUSD
Volatility Squeeze System BTCUSD– 15 Minute Chart
(past performance is not indicative of future price behaviour)
Volatility Squeeze System Advantages
- This is a pure price action trading strategy that requires no technical indicators.
- It can be applied on any underlying crypto asset and on any time-frame.
- The rules are clear and precise, leading to a discretion-free trade entry process.
- All you need is only a few minutes a day to check and place your trades.
- The risk-reward ratio is usually excellent because most NR7 breakouts lead to sharp price moves.
- Since this strategy mandates that there be a NR7 bar before you can go ahead and buy or sell any asset, it will stop you from over trading.