Several key price patterns can serve as alerts to the potential for significant range expansion:
1. NR7 — the narrowest range of the last 7 days (Toby Crabel introduced this term in his classic
book, Day Trading With Short-term Price Patterns and Opening-range Breakout);
2. A cluster of 2 or 3 small daily ranges;
3. The point of a wedge-type pattern (which usually exhibits contracting daily ranges);
4.A Hook Day (wherein the open is above/below the previous day’s high/low — and then the price reverses direction; the range must also be narrower than the previous day’s range; leads traders to believe that a trend reversal has occurred, whereas the market has instead only formed a
small consolidation or intraday continuation pattern);
5. Low volatility readings, based on such statistical measures as standard deviations or historical volatility ratios or indexes;
6. Large opening gaps (caused by a large imbalance between buyers and sellers);
7.Runaway momentum (markets with no resistance above in an uptrend or no support below in a downtrend. This condition differs from the above setups in that volatility has already expanded.
In a momentum market, however, the huge imbalance between buyers and sellers continues to
expand the trading range!)
Leave a Reply