Range bar charts
Range bar charts are the relative newcomers to the charting world, and are composed of bars that are based only on price activity, thereby eliminating time, number of transactions and volume from the equation. Each bar represents a specified price movement, such as 10 cents or 50 cents, and once price has moved the specified amount, one bar will close and a new will open. The three governing rules of range bars are:
Each range bar has a high/low range that equals the specified range;
Each range bar opens outside the high/low range of the previous bar; and
Each range bar closes at either its high or low.
Unlike time-based intervals where an equal number of bars print each trading session, any number of range bars can appear during a session depending on the volatility of the given market.
Range bars can help traders view price in a consolidated manner. A lot of the noise that occurs when prices bounce back and forth in a narrow range can be reduced to one or two bars, helping traders distinguish what is happening to price. Because much of the noise is eliminated, range-bar charts make especially ideal charts on which to draw trendlines to point out areas of support and resistance, as shown in “Home on the range” (below).
Determining the best chart interval requires practice and screen time. The chart should match the trading style and the time frame in which the trader operates. It is important to remember that time and activity chart settings are relative to the market being traded, so no single setting is appropriate across all markets or trading styles.
Jean Folger is the co-founder of, and system researcher with, PowerZone Trading, LLC. Jean can be reached at www.powerzonetrading.com.