24 Apr 2013

Trading with Range Bars - What They Are and Why You Should Be Using Them


Today I wanted to cover some trading basics and discuss just what range bars are and what sort of advantages they can offer to your trading approach.  Range bars are a relatively new development in the world of trading and as a result a lot of people don't know much about them and haven't actively used them in their own trading.  This is a shame, as properly utilized range bar charts can be an extremely effective way of breaking down the market's price action and offer a number of advantages over conventional time-based charting.



The Invention of Range Bars


To start, let me give you a brief history on range bars.  In 1995 a Brazilian broker and trader named Vicente M. Nicolellis Jr. decided he needed a better approach to handle the volatility of his local markets in Sao Paulo where he operated his trading desk.  His solution was to eliminate the time element from the equation and instead just concentrate on the price action.  To do this he developed an extremely promising approach called constant range bars, which had a number of characteristics:

  • Each bar is the same height because the range is constant
  • The close of the bar is always at the high or low of the bar
  • The open of a bar is always one pip (or tick) above or below the preceding bar
  • The time period covered by each bar is variable as time is irrelevant to range bar creation

Using this method a trader could choose the range they found most useful for their methods (we use mostly 3-5 pip range bars at Samurai Forex Trading) and apply new approaches that were otherwise unavailable using their previous charts.  This new range bar development provided Mr. Nicolellis many advantages over time-based charting.



The Advantages of Range Bar Trading


For one, using range bars helps smooth out the price action and eliminates a lot of the market noise.  Since only price matters to range bar creation and not time, periods of chopping action are minimized and false signals are reduced.  We can see in the chart below how effective this can be, where extra bars print in the strong trending move up (allowing us additional entry opportunities) while less bars print while price is moving slowly and is quite choppy (thus keeping us out of false moves).


Using range bars also more clearly highlights potential areas of support and resistance.  You can often see this in the video recaps I post when price is moving quickly.  Support and resistance areas that may have previously been hidden within M5 and M15 bars become clearly visible by using small range bars.  We can use these areas as extra evidence for our trades and also as highly effective potential exit points in our trade management strategies.


But probably the most important advantage of range bar charts is that they allow us to minimize or in some casesbeven eliminate the lag time of indicators.  Using indicators may only be a small part of a comprehensive overall trading approach, but they can still be highly effective if used in a way that minimizes the noise and false signals.  By focusing on price alone and removing the time element, many indicators become much more accurate and powerful.  For example, in The Elite Range Bar System we use moving averages to help us time our trades by taking entries in line with short and medium-term momentum.  By removing time we are able to focus on the movement of price itself which allows us to be more precise.  Where a trader might normally have to wait for a M5 or M15 bar to close, we can enter within that bar by trading strictly off the movement and momentum of price.  This makes for an extremely effective trading approach!


Here we have an example of how range bars can be very useful in fast trends by using moving averages to gauge short-term momentum.  Where the M5 doesn't offer much opportunity for joining the bullish run, the RB3 (3 pip range bar) chart shows the smaller price action pullbacks the M5 bars hide and allows us to take some high-quality entries in line with the overall move.  The same sort of price action can occur on price extremes as well, where quick rejections on time-based charts don't give us an entry but the clarity of range bar price action does.




Range bars can also be highly effective with oscillators such as MACD or Stochastics.  Although I no longer use these directly in The Elite Range Bar System, for over a year I did trade range bar strategies with some of these indicators and I found them to be far more effective than with time-based charts for trading ranges and counter-trend.

By eliminating time and focusing on price alone, these oscillators built themselves in a completely different way that greatly improved their accuracy.  Things like overbought and oversold levels were based on price alone and were better than ever.  Try them out on some range bar charts for yourself and you will see what I mean!



Conclusion


If you have been trading time-based charts for any length of time you will likely find it well worth the effort to do some research and testing with range bars.  Not only will they offer you a completely new perspective on trading and price action, they are also highly effective in an actual live trading environment!  If you want to see more of range bars in action I would greatly encourage you to watch some of our video recaps here on the blog so you can see how we use them to effectively pull pips out of the market.  If you're looking for a more comprehensive approach that includes setups and trade management strategies you can take a look at the page for our Elite Range Bar System course which contains a complete trading methodology.

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