Friday, April 19, 2019

Trader Notes: Trading with the Range Bars


Basics.


The Range Bars are a different way to create and read a stock chart. Develop by Vicente Nicolellis, it exploits the volatility of the markets, making the time irrelevant in a chart, eliminating it. The main feature of this tool is, in my opinion, the great way it filters the noise, and so, avoiding from our analysis many usual false signals and whipsaws.

In a time-based chart of, for example, 10-minutes, we have a bar every 10 minutes, and so the same number of bars for one hour, and so, for all the session, regardless the volatility of the stock. In the range bars, we don't know how many bars are going to be plotted because it depends on volatility: when it's high, more bars are printed. For low-volatility, fewer bars will be print.

Three basic rules define a chart with Range Bars:
- Each range bar equals a high-low range, the specified range that we have to decide.
- Each range bar must open outside the high-low range of the previous bar.
- Each range bar must close at either its high or its low.

The best way to understand the power of this tool is by comparing, in your trading platform, a usual 1-minute time-based chart, with a range bar chart, during an hour, or better, for a complete session. Spend your time watching the range bars in action, trying with different values of ticks as range setting for each stock or instrument, viewing when you get more clear charts, with less noise, so you can draw our usual support and resistance levels, trendlines, channels, triangles, etc.

As a tip, many traders recommend, as a range setting, the Average True Range (ATR) of the stock. That is a measure of volatility, consisting of a 14-day moving average of the true range (high minus low). Finally, another advantage of watching them in action is that we can notice the "timing" of the bars: the slower the bars were print, means lower volatility. The faster they were print, the greater the stock volatility, and so, better trading opportunities.


The best way to view the goodness of a Range Bars chart (below) is by comparison with a 1-min time-chart (above). Highlighted in yellow is an aleatory lapse of a session, between 13:00 and 14:30 EST. Compare the many whipsaws in the time-chart, that can confuse a trader, versus the clean candles in the Range Bars, almost flat, with unnecessary noise. That happens every moment in a daily session. A consequence of this is that the drawing of trendlines, supports-resistances, and patterns is more clear and trustworthy in a Range Bars chart.
Also, we can verify that in the last 30 minutes of the session, the candles in the Range Bars chart increases due to more volatility in the stock, a detail that we can't check immediately in the time-based chart.





Intraday Strategy using Range Bars 


After many testings, simply by trial and error, I prefer to use the Range Bars for a day-trade, with the ATR as range setting. Choose your own timeframe in the same way, always according to your favorite instrument and trading system.

In the web, you can find some strategies for use with range bars. After analyze and test many of them, I get better results with one described by Rockwell Trading. It's simple and powerful. The strategy use range bars in conjunction with the Bohlinger Bands (BB) to identify trends, although the BB works best in ranging than in trending behavior of a stock. For uptrends, use the upper BB, and for downtrends use the lower BB. A setup parameters of 12 for moving average and 2 for the standard deviation, works fine for day-trading. For identifying strong up-down trends, we need two more popular indicators: MACD (using its standard setup with 12,26,9) and RSI (Relative Strength Indicator, set up with 7 bars, oversold 30, overbought 70).

a) You identify the ideal entry point in a strong uptrend when:
- The upper line of the BB is pointing up 45 degrees or more and range bars are touching the band as a magnet.
- Confirm the uptrend if the MACD line is above zero AND above its average line. Use this to avoid false signals. 
- The RSI is a second confirmation: in an uptrend verify is above 70 and stay there for a while. 
- Only entry when the three technical indicators match with the conditions.
- End of Trend: when upper BB starts to flat or turns around, or MACD or RSI confirmations changed. Any of them.

b) The same procedure works for strong downtrend
- The lower line of the BB, the primary indicator, is pointing down 45 degrees or more and the range bars touching the band as a magnet.
- Confirm the downtrend if MACD line is below zero AND below its average line. Use this to avoid false signals.
- The RSI is a second confirmation: in a downtrend verify is below 30 and stay there for a while.
- Only entry when the three technical indicators match with the conditions.
- End of Trend: when lower BB is flattening or turns around, or MACD or RSI confirmations changed. Any of them.


Last week, US Steel X tumbles due news of two downgrades (Credit Suisse and Bank of America) and then technically because a breakdown from its 2-year support at $18. Since that day the stock is in a clear bearish bias, the trend to use for a short-term trade.
As you can view, the chart with range bars (using the ATR as range) fulfill the conditions of the strategy at 9:00 EST: price touching the lower BB that is pointing down 45 degrees, the MACD line (blue) is below both zero and its average (red), and the RSI is below the 30 level. So, the entry point is in that candle, with a stop loss in $16.9. Usually, this strategy is quick, in this case in less than 30 minutes appear the exit signals, simultaneously, for a gain of $0.4 per share. A simple strategy.







As 

As other strategies I post in this blog, this one, being intraday, requires constant vigilance and risk management and is a good method to avoid one of the main causes of losses in stock trading: the false signals. Try it first on PaperMoney mode, because requires practice: you will be amazed how it worksTake note that there's no infallible or magic indicator or strategy: all of them give sometimes errors. 

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