Classic Geometric Patterns and Narrow Range Setups (NR7)

This is a stock that came up on my scan. There are some pluses and minuses to it, but let the market, specifically volume, give you the clue as to what to do.If you look back on this chart alone, you'll see this pattern repeated, followed by some nice moves. Although it appears I have drawn a simple rising wedge, the scan is actually for NR7/ID's with a low near term historical volatility. Essentially, these criteria quantify the triangles, wedges, pennants, and flags.It is a fact that volatility cycles. And it is a fact that stocks trend and consolidate. Combining the two facts produces this setup.
Attachment: forest oil cp (new)- daily.jpgThis has been downloaded 3510 time(s).

Post from inandlong:here is one that occured Monday. The symbol is CLE Claires Store Inc. BJ looks very similar so both can be studied as very nice examples of the NR7ID at work. BJ is BJ's Wholesale Club, so I guess there was some retail thing going on. LTD and TGT were also on the list but they were victims of the nemesis of this setup, the outside day. And yet, there is a positive to that too.

Take a look at the CLE chart. Starting from the left, there is a violet line beneath an NR4ID. The NR4 is another "popular" range, so you can expect it to work too. The real deal though is that it is an inside day, which manifests compressed volatility.

The brown line is just beneath an inside day. The two blue lines indicate NR7ID's. The volatility was not as low for the second one as it was the first, but in both cases there is some sideways action prior to the next move.

This trade is intended to be a 1-4 day trade using trailing stops. I have rarely traded this setup per se, but have looked at it on and off for years. I am presently working it in to my trading plan.

The nemesis of this setup is the outside day. But, the beauty of this setup is that even an outside day can be profitable. The proper way to trade this setup is to have a stop and reverse order in at the opposite extreme from your entry. The narrowness of the narrow range day makes the loss very reasonable, and many times the reverse negates the loss, or very nearly does so.

One way to filter the trades is to determine the limit of risk you are willing to accept, and take only those trades that are within that limit. Another way is to take only those trades that are in the same direction as the prevailing trend.

The profit target on these types of trades should be consistent with the reward: risk ratio you select. The minimum acceptable is 1:1, so if the length of the ID bar is .50, then the profit target is at least .50.