Advanced Stock Market Trading - Level 2_10. Using NRB and WRB candles

Lesson 10: Using NRB and WRB candles

WRB Analysis is a method that involves the combination of analyzing changes in
volatility and supply/demand. Simply, WRB helps traders to understand and exploit
changes in volatility as a way to identify key price areas where there's an important
change in supply/demand prior to the appearance of any trade signals.

WRB Analysis can be applied to time based candlestick or bar charts, volume based
charts or tick based charts.
An in-depth WRB Analysis identifies changes in supply/demand that's occurring
between buyers and sellers along with providing a map for exploiting the price action
from swing point to swing point regardless if you're a day trader, swing trader or
position trader.

The word WRB means Wide Range Body (for candlestick chart users) or Wide
Range Bar (for bar chart users) and there are different types of WRBs based upon
volatility analysis, gap analysis or support/resistance analysis. The wide range is an
interval that has a body (which is the difference between Open and Close) or bar
(which is the difference between high and low) with a price area larger than each of
the prior three intervals. In fact, you can use any number greater than three intervals
as long as it's not less than three due to the behavior of volatility analysis because
it's less reliable and too difficult to analyze the volatility of two intervals or less
regardless if the intervals are based upon time, volume or tick. We will see a similar
methodology when defining the parameters of the NRB, or the narrow range bar.
Simply, you want as much market context as possible from the price action to help
ensure proper analysis of changes in volatility and supply/demand.

In this image we see an example of the WRB pattern in the Euro-Dollar chart.

About 25% of our clients use bar charts instead of candlestick charts while using
WRB Analysis in their trading.

WRB Analysis are not trade signals by itself. Instead, it must be merged with your
trade signals or used to confirm a trade signal is valid for trading. Thus, WRB
Analysis is an understanding of the price action and that in itself makes it much more
important than just trade signals. It can be used just to get a better understanding of
what really is leading your trading instrument for a particular trading day, used only
as profit targets for those that have trouble staying with their winners, used to
improve the trade management (after entry) of many different types of methods or
trading styles (day trader, swing trader or position trader).

Therefore, the purpose of WRB Analysis is to be integrated into your own methods to
enhance their performance of any of the strategies you may be using as your trade
methodology.

The narrow range bar, or NRB for short, is a popular trading strategy that offers fixed
stops and target levels. It can be used across any chart interval and the strategy in
itself is built on solid principles. Just like the wide range bar, the concept of the
‘Narrow Range bar‘ strategy is based on price action and states that when the range
(High – Low) is the lowest or the narrowest within the past ‘x‘ number of bars, it is
indicative of a big move either to the upside or downside. However, the NRB strategy
has many variations. One of the most popular methods is to take long positions
when an NRB set up is formed above the 100, 200 or 250 SMA and short positions
are preferred when an NRB set up is formed below any of those longer term moving
averages. Also accompanying the NRB set up is the ATR, the Average True Range,
whose value is used to determine the stops and target levels. The entry price for
NRB is often the high or the low which varies by an offset of a few pips.

In this image we see an example of the NRB pattern in the Euro-Dollar chart.

We make use of the ATR indicator to get the average true range value. The settings
of the ATR are again not set in stone, so the ATR periods could be 10, 20 or 14
depending on the chart interval you wish to trade.
For those who want to trade the daily chart interval, we recommend using an ATR
setting of 10 or 20, which translates to 2 weeks or 4 weeks of ATR. As a filter, we
make use of a 10 or 20 EMA.

Multiplying the ATR by 1, 2 and 3 and adding to or subtracting from the entry point
generates the first, second and third targets as well as the stop loss.

The same strategy could also be applied to weekly charts. The settings for the
indicators would however differ. For weekly intervals, we use 13EMA and ATR13.
For the very long term trades, one could also use a 52EMA and 52ATR, but that is
something entirely up to the trader to figure out what time frame and settings they
want to use. The important takeaway though is that the EMA and ATR should have
same values to make it easier for making trading decisions.

Traders can therefore make use of their own combination of methods to ascertain
the larger trend and then make use of pullbacks or retracements to identify the
Narrow Range bars and trade accordingly. Another example would be to make use
of weekly/monthly pivot levels as well, or even trend lines and channels.

In the final analysis, both WRB and NRB are useful tools to analyze volatility patterns
and it is recommended not to view them out of context. Trading signals should be
combined with other signals and further comprehensive information. Always look at
the market from different angles and gain a full perspective.