The NR4/IB strategy is basically a intraday trading system which was developed by the traders Lawrence A. Connors and Linda Bradford Raschke and presented in their book "Street Smarts". The meaning of the letters NR4/IB is "Narrow Range Bar 4Bar/Inside" and each time this pattern is detected there is a high probability that the market will produce a strong movement after the breakup of the formation. Basically, this pattern consists of a series of four bars or candles in which the fourth candle has two very important conditions:
- Condition 1: The last bar or candle (also called NR4) must have a minimum and a maximum lower than those of the three previous bars, which means that is a narrow bar as it is trapped within the range of the previous bars.
- Condition 2: The NR4 bar must not exceed the maximum or minimum of the bar that precedes it, which makes it what is known as the "inside bar".
In order to better understand the concept of the NR4 bar the following chart shows an example indicated by the white arrow (Click on the image to enlarge):
This trading system is based on a well known and reliable bar pattern known as NR4/IB. It was developed by two famous traders and can be used to trade in any market mainly for intraday trading. As with other chart patterns is not foolproof, but with the proper money management can be quite profitable.
This famous chart pattern can be used to trade with any instrument, including currency pairs (Forex Market) and shares for example. It could be necessary to make certain changes to the strategy depending on the market.
- A candlestick/bar chart to identify the NR4/IB pattern. As a day trading strategy we recommend times frames of 5 minutes, 10 minutes, 15 minutes, 30 minutes and 1 hour.
Trading system rules
According to the authors, the most appropriate technique to trade with the NR4/IB pattern is the following:
- Place a buy order at the maximum of the NR4/IB bar or a sell order in the minimum of the same bar.
- Another option is to place the buy/sell order at some point above or below the maximum/minimum of the bar depending on whether the trader wants to risk more or less during the trade.
- No matter if the price breaks up or down, one of our orders will be executed and the other will automatically become a stop loss. Once this occurs, the trader must act to find the best exit point, determining a take profit objective for example, ie a fixed number of points from the entry price, or using a trailing stop that is dedicated to follow the price movement closely.
- The trader who wants to trade using this trading system needs to spend time looking at charts to identify NR4/IB patterns. For this reason this is not a system for a person with no much time to spend.
- Also, for some traders could be difficult to identify this pattern. For this reason it could be necessary the use of an indicator to help find this pattern to place the buy and sell order in the bar.