Toby Crabel wrote the first book about short term trading with filters. His book Day Trading with Short Term Price Patterns with Opening Range Breakout detailed his research. It is the bible for short term traders. His book is in very short supply. Amazon only list three for sale with $665 as the cheapest one. Toby Crabel now manages several billion dollars at Crabel Management. Rumors circulated that he was buying every available copy so that he could put the cat back in the bag.

Range Expansion and Contraction
His main thesis was that the market has periods of range expansion and range contraction in volatility. After a period of range expansion, the market needs some time to digest it’s movement. Typically, the price action is choppy as the market establishes a new equilibrium. Breakout trades after a period of range expansion are less successful. They typically have lower win % and lower average wins per trade. Conversely, after a period of range contraction the breakout trade has much better performance statistics. The secret was to define those periods of transition.

The Crabel Filters
Toby focuses on short term trading. The holding period is most often intraday or as much as three days. He began researching a filter to identify the range contraction period in the market. He focused on the daily range.He tested many variations but found a few good filters. He classified days by their range characterisitics. He labeled them by the number of days and the volatility component. For example, his first was the inside day. An inside day is when the complete daily range is within the previous day’s range. After this condition is met, a breakout from the recent trading range has better winning statistics.This chart has the inside days highlighted with the show me red dot.

NR4 and NR7 Range Days
He also identified a few more filters. He called them the NR4 and NR7. The NR4 means narrow range 4. An NR4 is a day that has the narrowest range of the previous four days. For example, the SP 500 had a NR4 day on Jun 23. The daily range of was the lowest among the previous four days. A NR7 is the narrow range 7 which is a day that has the the lowest range in the previous seven days. The charts have dots next to the NR4 and NR7 days.

Next we will explore more of his filters and how to incorporate them in your trading.