Inside Day NR4 (ID/NR4)

Toby Crabel did some serious work on volatility patterns in price movement. The Inside Day/NR4 (ID/NR4) is one of the patterns he wrote in “Day Trading with Short Term Price Patterns and Opening Range Breakout“.

An inside day is one with a lower high and higher low than the previous bar. NR4 is a bar with the narrowest range out of the last 4 bars.

Hence, ID/NR4 is an objective criterion for identifying days of decreased range and volatility.

Once we find an ID/NR4 pattern, we aim to trade the breakout as volatility resumes.

Trading Rules for ID/NR4

Rules For Long

1. An inside bar with the smallest range out of the last 4 bars.
2. Place buy stop order above the high of the bar.
3. Wait for a breakout to trigger order.

Rules For Short

1. An inside bar with the smallest range out of the last 4 bars.
2. Place sell stop order below the low of the bar.
3. Wait for a breakout to trigger order.

Trading Examples for ID/NR4

Winning Trade

This chart shows the daily prices of EUR/USD. The green arrow marks an inside day with the smallest range out of the last 4 bars (ID/NR4).

We placed a buy stop order placed at the high of the ID/NR4 was triggered the next day. Prices went up for the next few days.

The previous bullish price action was ideal for this long position.

1. The outside bar with a long bottom tail points to buying pressure.
2. The buying pressure was sustained by the bullish follow through.
3. The three bearish bars before our signal bar was great but the support from the previous swing low (blue line) held up. The bar that tested the support showed an extended bottom tail (buying pressure).

Losing Trade

This daily chart of chemical giant DuPont listed on NYSE shows an ID/NR4 (green arrow).

We entered the next day as prices broke the high of the ID/NR4 bar. Prices moved sideways for a few days before stopping us by breaking out of the low of the ID/NR4 pattern.

Dupont was trapped in a trading range. In a range, we should sell high and buy low. However, the ID/NR4 gave a buy signal at the top of the range.

Let’s take a look at the specifics.

1. After the breakdown of prices, a clear double bottom was formed.
2. Prices bounced off the double bottom with bullish action.
3. This terrible reversal bar (gravestone doji) confirmed that DuPont had entered a range. This single bar should deter most traders from going long until more bullish action unfolds beyond the range (marked by the two blue lines).

Review – Inside Day NR4 (ID/NR4)

ID/NR4 are days with low volatility and small range.

Unlike the Bollinger Squeeze which identifies a drop in volatility over several bars, ID/NR4 shows only a single bar contraction in volatility. Accordingly, ID/NR4 is a short-term volatility pattern.

Hence, it is crucial to look at the price action context before taking any trades with ID/NR4. Experiment with a trend filter like a moving average and pay more attention to the market context.

(Need help finding the pattern? We have an indicator for you.)

The winning example shows that, given the right context, this pattern is a great low-risk trigger.

However, if the market is in a range, the ID/NR4 pattern might be part of a prolonged congestion. The inside bar might even be a trap.

Although I did not cover any intraday trading examples, I have observed similar results while day trading.