Range Bar Trading Strategy – Backtest and Tactical Insights
Most price charts are time-based in the sense that a price bar represents price movement over a specified period of time. However, there are other chart types that are not based on time but, rather, on a specified price movement size; one such chart is the range bar chart. So, what is a range bar trading strategy?
The range bar strategy is a type of strategy that is independent of time. Instead, the chart is built to represent a specified range of price movements regardless of how long it takes the price to make that movement. This filters out price movements that are smaller than the range size, making the trend easier to visualize. The range bar trading strategy, therefore, is a trend-following strategy.
In this post, we take a look at the range bar chart and how to use it in trading. We end the article with a backtest of the strategy. If you are interested in range-bound vs trending markets, you might find our research about the Choppiness Indicator helpful.
What is the range bar trading strategy?
The range bar chart is a type of price chart that is independent of time. Instead, the chart is built to display a specified range of price movements regardless of how long it takes the price to make that movement. Unlike the more conventional chart types such as the candlestick and bar charts which print price bars based on time, range bars are printed only when the price movement has completed the specified range size.
For example, an hourly candlestick chart displays the price activity for each 1-hour time period during a trading day and each bar on a daily chart shows the activity for one trading day. The price moves both in the price and time axis, and in the time axis, it moves by the same standard time interval.
In a non-stop market like the crypto market, for instance, time-based charts will always print the same number of price bars over a given period — an hourly chart will print 24 bars over a day, while a daily chart will print 7 bars over a trading week — regardless of volatility, volume, or any other factor.
On the other hand, range bar charts can have any number of bars printed over a given period. The number of bars printed would depend on the specified range size and the volatility of the market: for any given range size, during times of higher volatility, more bars will appear on the chart, but during periods of lower volatility, fewer bars will print.
So, the time axis (though plotted to provide the price data for calculating the range bars) is redundant in a range bar chart. The range bars are not printed based on time movement, but on the trader’s specified range size.
Since different markets have different volatility, the specified range size should vary from one market to another. A trader may choose a 100-point size for a range in one market and 50 points for another.
It also depends on whether the trader wants to trade intraday, swing, or position methods. An intraday trader will want to use a smaller size range than a swing trader to see the smaller intraday trend. If the price moves 99 points in a day and an intraday trader uses a 100-point range size, the chart won’t price a full bar all day, and the trader won’t see what to trade.
The range bar strategy is mostly used for trend following, as the range bars filter out small price movements so the trader can see the main trend. That is, price movements that are smaller than the range size are filtered out, showing the trend more clearly and keeping the chart neater. As with other chart types, bullish bars are often colored green or white, while bearish bars are colored red or black. This makes for easier visualization of the trend.
Where does it come from and what is its history?
Range bars were designed by a Brazilian trader and broker, Vincent Nicolellis in the mid-1990s. Nicolellis spent over a decade running a trading desk in Sao Paulo at a time when the local markets were very volatile. The unending high volatility prompted him to look for a way to use volatility to his advantage, so he developed the idea of range bars, which consider only price, thereby eliminating time from the equation.
Nicolellis believed that price was the most important aspect when analyzing a security. He designed range bars to remove time in the analysis of price movements, so he can easily differentiate between a range-bound market (which stays in one bar or a few bars around the same level) and a trending market where bars are continually moving in one direction. As the name suggests, the range bars show ranging price action within a specified range size.
What are the rules of the range bar trading strategy?
Based on the nature of range bars and the way it tracks only the price movement, there are rules that can be derived from the range bar chart. These are the main ones:
- The chart prints a bar only when the price has moved the specified range size: That is, if the specified range size is 30 points, the chart prints a bar after the price has moved 30 points in any direction.
- Each bar has a high and low that is defined based on the input price level: The size of a range measures from low to high or the other way around.
- A new range bar opens outside the high or the low of the previous bar: This shows that the price has moved higher or lower than the previous bar to be able to open a new bar. But the new bar can move in any direction, so two bars can lie almost side by side.
- A range bar closes at the high or at the low: So, a range bar can either have one wick or no wick at all. It can never have two wicks as either the high or the low and the close is the same. Thus, if a price trends lower but couldn’t complete a range and later rises to close higher, it will have a lower wick. The opposite gives an upper wick.
How do you trade with range bars?
The range bar chart is very unique. By specifying the size of the range bars, you can filter out much of the noise that occurs when prices bounce back and forth between a narrow range. Such price movements can be reduced to a single bar or two, as a new bar will not print until the full specified price range has been achieved. So, with the range bar chart, you can distinguish what is actually happening to the price.
There are many ways to trade range bars, but the common ones are trend following, momentum, and breakout strategies.
- Trend following: This strategy tries to ride the trend to its very end. Since range-bar charts eliminate much of the noise, they are very useful for trend-following strategies. You can easily apply a trendline on the range bars to show the trend. Also, you can use the range bars to trail your profits — you can set your trailing stop to trail the price some two range bars away.
- Momentum strategies: Swing traders who want to trade the individual impulse waves in the trend direction can use range bars to improve their accuracy. Range bars can show areas of support/resistance where a pullback might reverse to start a new impulse wave in the trend direction. Even a trendline can serve as a dynamic support or resistance for trading new price waves.
- Breakout strategies: Since range bars make the trend and support/resistance areas more visible, you can use the range chart to trade breakout strategies. It’s easy to confirm when the price breaks out of a resistance/support or a trendline, as any choppy price action is swallowed up within the range bar.
When trading with the range bar chart, it is important to choose the right range size. If the size is too small, it won’t be able to filter out the market noise, but if it is too much, you end up getting in late in any trend. You also need to take into account the spread of the instrument you are trading.
There is no straightforward way to find the right range size for any instrument you are trading, but you can always experiment to arrive at the most suitable size. For an intraday trading strategy, the range size should be smaller so you can pick the trend of the day. Swing and positional trading require higher range sizes.
How do you read a range bar chart?
Range bars are used in technical analysis the same way as any other form of charting technique. But each bar represents a price movement equal to the specified range size. This movement can be in any direction, but as with other charts, the bar is bullish if it closes higher than it opened and bearish if it closes lower than it opened. Bullish bars are color-coded green while bearish bars are colored red.
Each range bar shows that the price has moved higher or lower than the previous bar’s high or low, as a new range bar doesn’t start to form unless the price moves away from the range of the last bar. Thus, when the price is printing consecutive bullish bars, it means that the price is trending higher, and when it is printing consecutive bearish bars, it means that the market is trending lower.
Whichever way the price is trending, the appearance of wicks can tell you something about buying or selling pressure in the market. When the price moves up but couldn’t complete a full range before turning downwards to close lower, it would be a bearish bar with an upper wick, which signifies high selling pressure in the market. On the other side, a bullish bar with a lower wick signifies buying pressure.
What is the difference between Renko and Range Bars?
Range and Renko bars are similar in that both are independent of time, use specified price sizes, and can be used to filter out noise in the market. However, they differ in many ways. Here are some of the differences:
The Renko box is printed on the chart only when the price moves all in one direction from the opening price of the previous brick, whereas the range bar is printed once the price shifts from the range of the previous bar, and the movement is up to the specified range size.
Renko bars are placed at an angle 45 to each other, and no two bars can be placed side by side. For range bars, two bars can be side by side, with only a little difference at the high/low.
A reversal bar in the Renko chart has to move double the box size before it can be printed. For a range bar chart, a reversal bar doesn’t have to move double the size of the range to be printed.
Most platforms don’t enable wicks for the Renko bar, so the Renko bar only shows open and close prices. A range bar, on the other hand, can have an upper or lower wick.
What is a range bar?
A range bar is a type of price chart that is independent of time. It shows a specified range of price movement regardless of how long it takes the price to make that movement. The chart is not like the usual chart types, such as the candlestick and bar charts, which print price bars based on time.
For a range bar chart, the trader has to specify the size of a bar. A bar is printed only when the price movement has completed the specified range size.
How do range candles work?
Range bars work like types of charts, such as the bar chart, line chart, and candlestick chart, except that they are not based on time but are printed based on the specified range size. As with other chart types, these bars provide traders with a visual representation of the market price action, only that it is not based on time.
For instance, with a time-based chart, each 15-minute bar shows you the price activity for each 15-minute time period. But for a range bar, the time is not considered. A bar can take as long as possible to print, depending on the volatility in the market and the size of the range. If the range bar size is small and there is high volatility, a bar can print in less than a minute, but if the range size is high or the volatility is low, a bar can take as long as possible to print. That is to say, the range bar doesn’t close at a specific time, but instead only when a range is completed.
What is the range in a bar chart?
The range in a bar chart is different from a range bar chart. In a bar chart, as with a candlestick chart, the range is the difference between the lowest and highest price levels over a specified period. So, if you want to find a 7-day range, you will check the lowest and the highest price levels over that period and subtract the lowest value from the highest value.
What is the best indicator for range trading?
There are many good indicators for range trading. The only way to know the best one is to backtest them based on your strategy and the markets you want to trade to know the ones that perform the best.
Some of the indicators to check out for range trading include the Bollinger Bands, stochastic, RSI, and moving averages. For range bars, moving averages are best for trend following, which the range bars help you with. The moving averages can serve as dynamic support/resistance for price bounces.
Pros and cons of the range bar strategy
There are many advantages and disadvantages of using the range bar chart. Some of the advantages of the range bar chart include:
- It filters out small price moves, making the trend easy to see.
- You can choose whatever range size you want according to your strategy and market volatility.
- You can identify support and resistance levels easily.
- If you want to trail your trend-following trade, you can use the range bars to do it — two bars below the price is a common method.
There are also some disadvantages to using the range bar chart, and these are some of them:
- It is difficult to know the right size of the range bar for optimal results.
- The range bar chart is not readily available in some trading platforms, so you would have to create them yourself with custom indicators
- The range bar chart only removes the time factor; it does not solve the volatility problem. When a market is choppy, range bar charts can appear choppy or not print any bar at all, depending on the brick size.
Example
A good trade example would be to identify a resistance level. Then, watch the range chart print a bearish (red) bar from around that level and go short with a market sell order from there. If the downtrend is a strong one, you may be able to ride it using the range bar. You can set your trailing stop two full ranges away from the price. In the chart below, the short position could still be in play:
Range bar strategy backtest
To backtest a range bar strategy, you first need to set the tick size of the bars. This should be documented on the trading platform you are using.
We are using Amibroker to show you the difference between regular bars and range bars, please look at the charts below:
The chart on the left uses range bars, while we have regular bars on the right. Clearly, we can spot the differences as the range bar chart has a lot more “space” between the bars.
However, we cannot backtest a range bar strategy with trading statistics and performance metrics because our data is not initially made with range bars, a prerequisite for Amibroker. Other trading platforms might be different, though.
FAQ:
How does the range bar chart differ from time-based charts?
Time-based charts, like candlestick and bar charts, print bars at regular time intervals. In contrast, range bars are printed only when the price movement completes a specified range size, filtering out smaller price movements and providing a clearer visualization of trends.
How do you trade with range bars?
Range bars are traded using strategies such as trend following, momentum, and breakout strategies. Traders can easily identify trends, apply trendlines, trail profits, and spot support/resistance areas. The choice of the right range size is crucial for effective trading.
How can I backtest a range bar strategy?
To backtest a range bar strategy, set the tick size of the bars based on your trading platform’s documentation. Use platforms like Amibroker, which allows you to compare regular bars with range bars, providing visual insights into the differences in market data.