The NR7 trading strategy is a narrow-range strategy that is both well-known and popular. If you do a search on the internet, you get multiple hits on the strategy. To our knowledge, the strategy was first developed by Tony Crabel as long back as 1990. The NR7 is a volatility strategy but enters on a day with a narrow trading range (low volatility).
In this article, we backtest the Narrow Range NR7 trading strategy. The strategy works reasonably well, but we improved it by adding one simple parameter.
NR7 strategy video
We also made a video of the strategy and the backtest results.
What is the Narrow Range NR7 trading strategy?
There is an expression in most languages that says it’s calm before the storm. The main idea behind the NR7 is to enter when the daily range is low – when markets are calm (a narrow range trading day – a narrow candlestick). Unfortunately, the strategy doesn’t come with a defined exit strategy – only when to buy.
Thus, we made our own version of the NR7 trading strategy and made the following trading rules listed below. We test the following hypothesis on stocks:
- The range, or volatility, is the difference between the High and the Low (each day).
- If today has the lowest range of the previous last 6 trading days, then we go long at the close.
- We exit at the close when today’s close is higher than yesterday’s high.
We have one parameter for entry and one exit criterium, and a trading strategy can hardly get any simpler than that (?). We test on the S&P 500 by using the ETF with the ticker code SPY.
If we invest 100 000 and let it compound since the inception of the ETF in 1993 we get the following equity curve and drawdowns:
The CAGR is 7.8% (time invested is 35%), the average gain per trade is 0.27%, there are 899 trades, and the max drawdown is 25%. These are reasonably good numbers but not worth trading (in our opinion). We believe the average gain per trade is a little too low for a holding period of several days. If it was an overnight trade or day trade, we would regard the gains as reasonable.
What about NR7 indicator ( narrow range strategy)?
What if we don’t use an NR7 bar (six past days and the current one) but other number of days? Let’s optimize the strategy and see if we can improve the strategy by using another lookback period for the number of days.
Why do we optimize? We optimize because we are looking for patterns and to check if our original strategy and pattern was good simply due to randomness.
The below chart shows the different P&L for different days:
The first column shows the lookback period of the High minus Low. The exit criteria are the same. As we can see, the average gain per trade doesn’t increase the longer we hold.
Can the NR7 trading strategy be improved?
Of course, any strategy can be improved, but we have to be careful not to curve fit due to excessive optimization.
We added one simple parameter to our original trading strategy (still NR7 and we kept the same exit parameter) and we got this equity curve:
The average gain per trade increases to 0.46 and the drawdown goes down to 13%. Compared to the original narrow range strategy, we reduced the number of trades significantly. For such a simple strategy, we believe these are good numbers. Here are some more numbers for the improved strategy:
- The number of trades is 376
- The win rate is 76%
- The average winner is 0.96%
- The average loser is -1.19%
- The profit factor is 2.35.
The win rate (success rate) is very high. We regard the win rate as one of the best trading strategy metrics.
We don’t disclose the added parameter because the strategy was our monthly trading edge for February 2022 (or you can buy it on trading strategies for sale – see strategy 17):
The advantage of the NR7 trading strategy
Worth noting is that 67% of the trades of the improved strategy are done on a day when the close is higher than the day before. This is a huge advantage. Why is that?
Because we are not necessarily buying on weakness. The best strategies in the stock market over the last three decades have been to buy on weakness – mean reversion strategies. The NR7 is not a mean reversion strategy based on weakness. We are simply entering on low volatility. Low volatility usually happens during bull markets, not bear markets or short-term weakness.
This means that the NR7 strategy complements any mean revertive strategies you might have in your portfolio of strategies, exactly what you should be looking for if you are serious about trading. Please read our separate article on this topic:
The weakness of the NR7 trading strategy
The difference between the High and the Low is the main component of the strategy. Depending on where you download the quotes you can get faulty data. We used data from Yahoo!finance, but be careful of the data. Please read the article below to understand why.
Amibroker and Tradestation (Easy Langauage) code for the NR7
If you would like to have the Amibroker or Tradestation code for the free strategy without the improved parameter, you can order it here when you become a Silver member. You get additional access to the code for at least 70 other of our free trading strategies.
NR7 trading strategy – ending remarks:
We believe the NR7 trading strategy is a strategy that can potentially add diversification to your existing strategies because it doesn’t necessarily buy on weakness. How the Narrow Range strategy correlates to your other strategies is hard to tell, that is something you need to backtest yourself.