Why the Narrow Range Bar Provides Explosive Profits

03/04/11 02:32:45 PM

by Jamie Theiss

The narrow range bar provides very tight stops, making it one of the lowest-risk entry signals.

Security: RIMM
Position: Buy

The narrow range bar (NRB) is one of my favorite reversal signals. It provides for very tight stops, making it one of the lowest-risk entry signals out there. While there may be no technical definition of an NRB, just by looking to your left on Figure 1, you will know it when you see it. They are simply significantly smaller than the previous bars to the left. The reason NRBs are so powerful is they are like a coiled spring under pressure. The normal volatility is compressed into a tiny range. One side or the other must capitulate, resulting in often-explosive movements. However, you don't need the explosive movement; just a return to normal volatility brings significant profits.

To set up this RIMM trade, we had a bullish gap up this morning along with rising moving averages on the upper time frame 15- and 60-minute charts. So we are looking for buyable events on pullbacks. I have identified the NRB on the chart, but let's watch how the trade sets up. Looking to the left of the NRB, you can see obvious bars that are significantly bigger. That tall green bar is $0.66 wide and the topping tail bar is $0.65. From that topping tail bar, you have the next three red bars being compressed, just like the coiled spring example. The first red bar's range is $0.46 wide. The next is $0.30, and then $0.21. The final bar is compressed down to only $0.15. Plus, it is located right on the eight-period moving average line (green).

FIGURE 1: NARROW RANGE BAR. The entry is $0.01 over the high of the NRB, while the protective stop is $0.01 under it.

Graphic provided by: Blackwood Pro.

The entry signal is $0.01 above the high of the NRB with the stop $0.01 below it. This is a very tight stop, so position sizing correctly allows you to load up the share size while keeping your risk amount the same. For example, if you have a $100 risk per trade, using $0.17 as your risk you can get 600 shares. If you had a more normal size bar of $0.35 or $0.40, your share size could only be approximately 250 shares to maintain the same $100 risk.

As you can see, the very next bar brings a return to normal volatility and a range of $0.51. Just that five-minute bar alone brings a 3:1 return on risk. Depending on your personal trail method and exit technique, even greater profit could have been achieved. You can use the NRB on any timeframe chart, not just this five-minute example.

I hope you can see and appreciate the value of the narrow range bar as an entry signal worth looking for and implementing into your trading plan.

Jamie Theiss

Jamie Theiss is a full-time trader who daytrades stocks, swing trades forex, and from time to time position trades commodities.


E-mail address:	jamie_theiss@yahoo.com

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Why the Narrow Range Bar Provides Explosive Profits

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