- March 3, 2023
- Posted by: NetPicks
- Categories: Trading Article, Trading Tutorials
Range bars provide a unique visual that stands out from the more traditional candlestick or bar charts. Instead of having different lengths and heights like a candlestick chart, each range bar is equal in size with its opening and closing prices either at the highest point or lowest point regardless of where it opened.
What are Range Bars and How Do They Work?
Range bars are a type of chart used to display price action in different instruments such as stocks, currencies, and commodities. They are designed to filter out the noise of short-term price movements, giving traders a clearer view of the market.
Range bar charts eliminate a lot of the noise because they are plotted based on price movement, rather than time, which is the case with traditional candlestick charts. A range bar is formed when the price of an asset moves a set amount or “range” in a particular direction, and a new bar is drawn only when this range is achieved.
The size of the range that is required before plotting a new bar, is determined by the trader and varies depending on the instrument being traded.
For example, if a trader sets a specified range of 10 points for stock TSLA, a new range bar will be formed each time the price of the stock moves up or down by 10 points. If the price moves up by 20 points, two range bars will be formed, each with a range of 10 points.
Benefits of Trading with Range Bars
The advantage of range bars is that they can help traders identify trends and patterns more easily, as the bars eliminate much of the noise and volatility seen in traditional candlestick charts.
They can help traders make better trading decisions by providing a clearer view of support and resistance levels, and by helping to identify potential breakouts and reversals.
Range bars were brought to the markets in 1995 by a Brazilian broker and trader named Vicente M. Nicolellis, Jr.
Range Bar Chart VS Candlestick Chart – Clarity In Price
This is the EURJPY Forex pair using both time-based and range-based charting using Tradingview platform during the same period. This platform defaults to using bars instead of candlesticks.
We can see that price movements have created easy-to-spot turning points in the market. Zones that have and could act as support and resistance are easy to spot.
Let’s contrast that with a time-based chart (daily) when Forex trading.
What can we see on the range chart when comparing these two charts?
+ The long tails on the price bars are removed
+ The areas of support and resistance zones are clear
+ More visually appealing
Having a specified price range uses only price to plot a single bar instead of the passing of time. Range bars help show you the picture of what price is doing. It does not matter what trading indicators you use, they will respond much faster and give a clear pattern to improve your trading.
Is There An Edge With Day Trading Range Bar Charts?
There is no guaranteed edge with day trading range bar charts, as with any trading strategy or tool. Some traders find that using range bar charts can provide advantages over other chart types for day trading.
Range bar charts can help traders filter out market noise and focus on significant price movements, making it easier to identify trends and potential trading opportunities. By setting a specific price range for each range bar, traders can adjust the chart to fit their trading style and the volatility of the market they are trading.
Some traders find that range bar charts are useful for trading in volatile markets or during periods of high volatility. This is because the bars adjust to the current price movements, rather than being restricted by fixed periods as in traditional time-based charts.
Range bar charts can help traders identify key support and resistance levels, which can be used to make trading decisions. Traders can also use range bars to help identify breakouts or trend reversals, as significant price movements outside of the range bars can indicate a change in market sentiment.
Range Bar Strategy
If you trade the Forex market as a day trader and you seek to make 10 Pips per trade wouldn’t it be more useful to pull up a 10 Pip range bar chart?
A 10-pip plot would ignore time and instead concentrate on price movement, and the price is what ultimately matters.
In this example, a trader can draw a downtrend line on the price that formed a double bottom. Looking for a long trade, a trader waits until the price closes above the downtrend line showing the price has just moved up 10 pips and reversed
If the current bar closes at its high, a trader would close the trade for profit.
Once the currency moves outside the 10 pip range and the range bar closes, another bar will form, no matter how many minutes or seconds this may take.
This chart is using a 50-pip range bar setting.
The 20 simple moving average is showing us the general trade direction and we can use it as a zone to monitor for pullbacks to move into.
Price had broken a previous support area and confirmed our downtrend. We will be looking for a rally to around the moving average that also coincides with a previous support zone.
The smaller chart shows that we need two obvious points to draw our upsloping trend line on the rally. These are complex pullbacks and have the benefit of trapping some traders to the long side.
The range bar chart allows a more objective view of turning points and pullbacks that you can trade. You can pick up the trend in price movement easier because we are not seeing extreme shadows on the upper or lower parts of the range.
If you are a trader that trades price ranges as part of their strategy, range bars highlight consolidations better than time-based charts because you are looking at the same price increment.
Range Bars Trading Strategy In Stocks
Range bar trading strategy in stocks is a great way to take advantage of the stock market’s quick movements. By utilizing range bars, traders can identify and capitalize on short-term trends that may be missed by traditional time-based charts.
Range bar trading can help traders filter out market noise and focus on significant price movements, making it easier to identify trends and potential trading opportunities.
Range bars can be used in many different ways, depending on the trader’s preference or trading style. One of the most common strategies is to look for breakouts from a range bar chart pattern or support and resistance levels. For example, if a stock has been consolidating around a certain price level for several days, a trader might watch for a breakout above or below the range bar to signal an imminent shift in sentiment.
On this stock chart, the price breaks over resistance and sets up a pullback in price. The 15-minute chart on the left shows an increase in market volatility with the pullback being a spike in price.
The $.50 range bar chart shows bars printed in an orderly manner allowing the drawing of a trend line. A trader can enter when a new range bar opens above the trend line showing a reversal from the downward movement in price.
Price also has a pullback to the trend line once it has broken above. Traders could enter when the price resumes the upside move.
What Range Setting Should You Use?
The range to use is a personal choice and can vary depending on the instrument being traded, individual preferences, and market conditions.
Traders should consider factors such as the volatility of the asset being traded, the time frame they are trading on, and their overall trading strategy.
One approach is to calculate the average true range (ATR) of the instrument and use this as a starting point for determining the range. The ATR is a measure of volatility and can be an excellent way to decide the range. If a trader wants fewer bars or more bars, it is easy to adjust the ATR period setting to a shorter or longer period.
It is also important for traders to consider their overall trading strategy when determining the appropriate range for range bars. Traders who prefer to take swing positions may use larger range bars, while those who prefer to day trade or scalping may use smaller range bars.
The best way to determine the appropriate range for range bars is through experimentation and practice. Traders may try using different ranges due to price activity and observe how it performs in different market conditions, then adjust if needed.
Pros And Cons Of A Range Bar Strategy
The range bar strategy has both advantages and disadvantages, so traders should assess each carefully before using them in live trading.
Here are some pros and cons of using a range bar strategy:
- Clarity: Range bars can make price movements clearer by eliminating the noise caused by small price fluctuations. This allows traders to focus on the overall trend of the market.
- More efficient: With range bars, traders can potentially trade more efficiently because they can identify trends more quickly and easily.
- Better risk management: Range bars allow traders to set stop-loss orders more accurately, which can help minimize losses.
- Less data: Because range bars only show price movements within a specific price range, they may not provide as much data as traditional candlestick charts, which can make it more difficult to identify important patterns.
- Limited use: Range bars are not suitable for all trading situations, and traders should use other chart types in conjunction with range bars to get a complete picture of market trends.
- Requires experience: Trading with range bars requires some experience and knowledge of market trends, so it may not be suitable for novice traders.
A range bar strategy can be a valuable tool for traders looking to make more informed decisions in the market. While there are some drawbacks to using range bars, such as the limited data they provide and the need for experience, they can provide a clearer picture of market trends and help traders manage risk more effectively.
Using range bar trading strategies will depend on a trader’s trading style and goals. It is important to carefully consider the pros and cons of this approach before incorporating it into your trading strategy. Whether using them in the stock market or the foreign exchange market, they can be a worthwhile tool for you.
If you decide to use range bars, it is essential to stay disciplined and to continuously monitor market trends to make informed decisions. With the right approach, a range bar strategy can help you become a more effective and successful trader in the long run.
Published: April 2017. Updated March 2023.
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