Range BarsTechnical Analysis
Range bars exist to compress sideways action in charts and allow the user to focus on trends, directional breakouts, and timing of trades on entry and exit. These price bars differ from Time, Tick, and Volume bars. These bars were created to filter out noise in the market, and are purely and only based on price. Each bar requires a change in price to print, and this change is configured by the user.
Once price moves past the set distance, the printed bar is completed and a new bar begins. Each bar will equal the set range in movement. This also affects the amount of bars shown. Smaller ranges require smaller amounts of movement to print new bars, resulting in more bars displayed. Larger ranges require more movement to print new bars and result in fewer bars displayed. The amount of bars you will see on any given day is based on the size of the bars versus the amount of price changes in the security you’re trading.
The hidden requirement of this system is each bar will close at a high or at a low. If price action stays within this range without clearing the high or low, you will only see one bar representing that time period. The high-low ranges of each bar being previously defined results in doji bars being an impossibility, but hammers can exist where reversals occur. It is possible to retrace previous bars in areas in a new bar moving in the opposite direction. Several bars retracing previous areas often represent a sidewinding trend consolidated into a few bars.
Range bars remove the possibility of longer bars unless you specifically request them in longer bars. The construction of range bars also eliminates other occurrences in pricing structure, such as gaps in price. Price gaps will be filled with multiple range bars, as many as it takes to fill the gap at your current range settings. Note that these bars will technically not have any volume since no transaction occurred at those prices.
Considering the asset’s volatility is important when selecting the range, which determines the quality of signals delivered. Range bars are highly useful with assets which change in volatility or have high volatility. Price range slightly beyond the average range of an asset over a period of time is common, allowing for an increase of volatility beyond the “standard” to create new bars. An increase in volatility will create a lot of bars fairly rapidly, a low amount will create few or no bars at all. Note: If volatility becomes extreme, the quality of signal may suffer due to rapid shifts in price movement. Knowledge of the security’s fundamentals and awareness of situations which will increase volatility are recommended when using range bars since this allows you to act with certainty during directional movements.
These settings are not one size fits all, you will have to adjust range bar distances for each asset traded even within the same asset class. Securities of larger market values have larger price movements than smaller sized securities with the same volatility level. With the same range bar movements, you will see substantially more bars from price movements in the larger asset, even though they have the same volatility.
You can calculate your profit and loss per bar, but it will change based on assets or markets traded. Your range bar is set based on the specified number of “price ticks”. Each price tick has a specific value called the “tick value”, the per-tick gains and losses for the futures contracts and ETFs. Leveraged assets will have differing profits or losses per tick depending on their overall margin.
Multiply the amount of assets in your position times the amount of ticks specified per range bar times the tick value to see your estimated profit and loss per completed range bar. You can use a calculation to set stops losses and take profits based on your desired gain or loss per trade, or bar ranges that add up to desired targets. This allows you to design your system based on your trading goals in addition to signals.
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