In this article we will analyze an interesting compression pattern of volatility known as NR4 (Narrow Range 4). We will apply this methodology to the future on gold (GC), one of the most liquid and widely negotiated tools to the Comex. To better understand the development that we will face later, it is important to underline that the session of this tool goes from 18:00 to 17:00 on the following day, according to New York time.
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How Toby Crabel’s NR4 pattern works and what signals it provides in trading
The NR4 pattern (Narrow Range 4) was conceived by Toby Crabel, a well -known trader and author, famous for his research on volatility and break -in strategies. It is a compression pattern of relatively simple volatility to identify.
The logic of the pattern is to identify a bar (or candle) whose range, calculated as a difference between maximum and minimum, is the closest compared to the last three bars. This compression of the range indicates a reduction of volatility, which could precede strong management movements of the price.
Development of a Breakout strategy on gold based on the NR4 pattern
To develop a strategy we will use a 60 -minute time frame following the original rules proposed by the author. Given that after the formation of an NR4 we generally expect a directional movement, the most effective approach suggested by the author is that of a breakout strategy.
In particular, the strategy will enter into the breakdown of precise levels, identified by the bar with the narrower range: if the price exceeds the maximum of this bar, a long position will be opened, while if it breaks the minimum a short position will be opened. However, we will add a further condition, using a simple mobile average for 20 periods as a directional filter. In fact, we will take Long signals only when the price is above the mobile average, and short signals only when it is below. In this way, in the event that both levels are broken in the next bar, only the entry in the direction of the main trend indicated by the mobile average will be taken into consideration. In this way, false signals are avoided such as the one shown in Figure 1.
The entrances will be limited to one per day, and all positions will be closed to the maximum by the end of the session, configuring the strategy as purely intraday. To adequately manage the risk and avoid outliers (anomalous values) during development, we will set both a stop loss and a take profit of 2,500 dollars.
Figure 1. False signal of the Breakout strategy on gold without the mobile average.
Figure 2
Backtest of the strategy with NR4 patterns on the future gold: results from 2010 to 2025
Analyzing the Equity Line shown in Figure 3, relating to the period between the beginning of 2010 and today, a decidedly positive growth is observed, with a net profit that exceeds 260,000 dollars. The overall trend shows that the NR4 pattern has brought excellent results, albeit with a prolonged drawdown phase between 2019 and 2023.
The Total Trade Analysis, visible in Figure 4, highlights a Averrage trade equal to about 64 dollars. Although the strategy is well balanced between the long side and the short side (in terms of Averal Trade), unfortunately this value is not enough to cover operating costs such as the slippage and commissions. This aspect limits the applicability of the live trading strategy, but still represents a good starting point.
Figure 3. Equity Line of the Breakout strategy on gold with pattern NR4.
Figure 4
Refinement of the strategy by optimizing trading times
Until this point, the strategy has been tested on the entire bargaining session, but it may make sense to evaluate whether it is more effective to operate only at certain times. In figure 5 is visible the result of the optimization of the start time of the operating window. We note that the best results are obtained by choosing the first hours of the session, which we remember starts at 18:00 (New York hours). At this point, we choose as the start of the operating window on 21:00, a time that allows the pattern to form more coherently avoiding the use of bars still belonging to the previous session.
As for the end of the operating window, the analysis reported in Figure 6 shows that ending to operate at 11:00 (always New York hours) brings significant improvements in terms of Net Profit, Drawadown and Averal Trade. The surrounding times also confirm the goodness of this choice, suggesting a certain robustness of the result.
Figure 5
Figure 6
RESULTS OF THE ORO STRATEGY WITH PAPTERN NR4 after optimizing the hourly window
After implementing the operating window starting at 21:00 and end at 11:00 (New York time), the results improve significantly. As highlighted in Figure 7, Equity Line is much more regular. The drawdown, although present, has been significantly reduced compared to the previous version of the strategy. The Net Profit also went from about $ 260,000 to about $ 300,000.
Analyzing the new Total Trade Analysis in Figure 8, you can see an increase in the winter trade, which went from about 64 dollars to over $ 88. This is an important improvement that confirms the validity of the addition of the operating window.
Despite this, this value is not yet large enough to bear the operating costs of a real scenario. However, the increase represents a clear sign that the direction undertaken is promising and constitutes an excellent starting point for further developments.
Figure 7
Figure 8
Conclusions on the application of Crabel’s NR4 pattern at Trading Breakout on the Future of gold
The results obtained confirm that the NR4 pattern, if used with criteria and applied to an instrument such as future on gold, can produce really interesting performances. Once again it is shown that, following a compression of volatility, it is likely to attend a phase of expansion of the price, and exploiting this phenomenon with a breakout logic is an excellent choice.
At this point, to make the strategy even more robust and with an Averal Trade is large enough to be ready for live trading, different roads could be taken: for example, optimize the stop loss and the take profit compared to the predefined value of 2,500 dollars, optimize the period of the mobile average that we have set to 20 thus taking a standard value, or explore if there are days of the week in which better than others. But for today that’s everything, I leave this task to you.
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Until next time,
Andrea Unger