As traders, we should always test different ways of trading to try to find something that will give us a better edge in our trades. We should not be afraid to explore new and radical approaches that have not been used in the trading arena. Range bars are a new method of charting that qualifies.
Sideways markets and flat periods of time in markets have been the nemesis of traders for many years, and range bars can help. If your price bar charts have not helped you to become successful, then it is time to try something new, something different, something that could give you a better chance of success.
HISTORY OF RANGE BARS
In the mid-1990s, a Brazilian trader, Vicente M. Nicolellis Jr., developed a new and exciting price bar for charting. He had found markets in his country to be unstable and unpredictable and that, for sizable periods of time, the market would be in a sideways or consolidating action. After careful deliberation on how to tame this volatility and price bar movement variations, he came to the conclusion that eliminating the time factor would form the basis of his hypothesis.
Nicolellis proceeded to develop a price bar without time involved at all, just price. This became known as the range bar, or breakout bar.
Each range bar has the same price increment and each bar closes either at the high or the low, regardless of where it opened. Take a look at the charts in “All the range” (below). Both are close to one hour, 10 minutes long. The first chart is a 10-price increment range bar and the second one is a three-minute chart.
The range bars took the same amount of time to fill but had four less bars than the three-minute charts. Those trading the three-minute charts had a non-directional type movement. The range bars, however, eliminated all the noise, which could have caused many false signals. This is a vast improvement for traders, as many do follow these deceptive signs and fail in their trades. Longer time frames show this even more clearly (see “Longer-term look”).
When a market trades within a range, it is really not offering any new information, so it constitutes only one data point. A new data point is created when that range is broken.
Each market is unique and requires different measures for range bars. We find the following range bar values appropriate: for the mini Dow Jones, 25; the Russell 2000, 15; gold, 15; and the Dax, 10. Other settings that can be applied include the euro futures, 15; E-mini S&P 500, 12; the Nasdaq, 15; crude oil, 20; and the Hang Seng index, 30 or 40.
What that means is that, for example, on gold and the Russell, each individual range bar is made up of 15 price increments. On the Dow Jones, there are 25 price increments per range bar, and on the Dax, there are 10 price increments. While these increment values are well tested and have shown to be reliable in many different market conditions, you should do your own confirmations and trials to figure out the number that works best for you personally. The increment value that fits one style of trading, risk management practices or profit goals may not fit another style.
There are many charting platforms that support range bars, including Trade Navigator by www.genisft.com, Ninja Trader by Desertsoft (www.desertsoft.com), and eSignal (www.esignal.com).
With range bars, traders no longer have to depend upon timing; range bars are not predicated on time. There is no variation in the interpretation of the price patterns and nothing has been altered with the entry patterns in the minute charts. You only have to be able to add and subtract the range bar values you are working with — that is, add or subtract 25 for the mini Dow, 15 on the Russell, and so on. Exit signals remain identical and range bars are particularly good for the aggressive trader as they can choose their entry more easily. Range bars show the market more easily and eradicate the stressful psychological mind games that can cause loss of focus and bad
decisions (see “Avoid the chop”).
Additional benefits with range bars include:
1. All range bars are the same size on each chart and the resulting charts look smoother and market “noise” caused by the minute bars is eliminated to a greater degree. For instance, all the bars on the Russell are going to be 15-tick price changes and each bar is exactly the same size.
2. The time factor is eliminated. The pattern triggers are the same as the regular minute bars. This means that, if you are a “bar close trader,” you can do the same thing and if you trade with 20-30 seconds to bar close, you can do that too. The tendency is to wait until the bar closes and the new bar starts. This helps traders to put buy and sell stops in ahead of time, thus getting in first in line, or close to it.
3. Range bars show trends more readily and they also show a sideways market more clearly without the attendant choppiness.
4. Traders can still use their favorite indicators. There is no need to change your setups on your indicator.
5. Traders will find they make fewer trades, in as much as they will have bigger stops but the successful trades will be more profitable. This means larger trades, staying in those trades longer, improving your risk/reward ratio and fewer trades that do not get follow through.
6. Traders will know where the top or bottom of the bar is, which will allow the trader to enter stop buy/sell orders ahead of time which, in turn, will enable the trader to be in line early. You can use stop orders to enter a trade because you know where the top or bottom is going to be. In other words, if you have the bar going up and you know what the low is, you can put a 15-tick (or whichever setting you are in) price change from the low and set your stop that far off the high or low. If you make a new high or low, then you might have to adjust your stop accordingly.
7. Traders can use the same money management strategies, but it is strongly recommended that statistics be kept and analyzed as normal.
The creation of the personal computer meant technical traders no longer had to painstakingly chart every tick in a market on graph paper. Range bars free up time in a similar fashion. Technical traders can ignore choppy range bound markets and wait to be alerted by a new data point that could take several hours or just minutes.
Range bars are an innovative concept that will give traders the opportunity to improve their trading success rate. While your basic setup may not be broken, in this fast-moving society, change is inevitable, and traders should evaluate range bars as another approach to profitable trading.
Ken Wood has been trading for 34 years. He teaches and mentors traders around the world through his CCI Club Trading System. He is the author of “Trading the Patterns” and is founder of Woodie’s CCI Club LLC.