Narrowest Range Signals for Market Compression Breakouts

Summary

The document describes a narrow-range indicator based on comparing the current bar’s high-to-low range with the smallest range observed over a preceding check period. When the current range is smaller, the indicator flags market compression. Its parameters are the number of bars used to calculate each range and the lookback period used to identify the minimum range.

The indicator does not predict whether price will break upward or downward. The suggested approaches are to place stop orders at both edges of the signal range, or to combine the signal with a trend indicator and place an order only in the trend direction, removing it if price breaks the other way. The author advises against using it on very short, noisy time frames. No performance evidence, exit rules, or risk controls are provided, so the signal identifies a possible volatility contraction but does not establish that a breakout will follow or persist.

Key ideas

• The indicator flags compression when the current bar range is below the minimum range in the comparison period.
• The calculation uses a range length and a separate period for checking prior ranges.
• The signal gives no direction, so breakout orders can be placed at both range boundaries.
• A trend indicator can be used to restrict entries to the prevailing trend direction.
• The document discourages applying the signal on very short, noisy time frames.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.