The Bottom Of The Range Trading Strategy (Range-Bound Trading)

The Bottom Of The Range Trading Strategy is a method for trading stocks or assets. It looks for times when a stock closes near its lowest point of the day and uses a specific formula called the IBS to confirm a trade opportunity. The strategy requires the IBS to be lower than 0.1 and for today’s closing price to be higher than yesterday’s. Trades are entered at the close and exited after 3 days. Backtesting from January 2005 to now shows a 10.69% return with 14 trades, 12 of which were winners, with an average gain of 0.76%.

During my early days as an investor/trader in the early 90’s, I was told (in many books) that an up day that finishes near the low of the range is a bad sign. Is this true? The only way to find out is by backtesting. Backtesting is the core of what we do and we believe backtesting works.

Let’s test a trading strategy:

The Bottom Of The Range Trading Strategy

Here is the strategy:

• (c-l)/(h-l) (the IBS) must be lower than 0.1.
• Today’s close must be higher than yesterday’s.
• If the above conditions are met, then enter on the close.
• Exit on the close after 3 days.

Here is the result:

%	#trades	#wins	Avg
10.69	14	12	0.76

The test period is from January 2005 until the present. Here is the equity chart:

After Hanna’s study, this setup has occurred 4 times until the present with these trades: 0.17%, 0.9%, 0.7% and 1.52%. Few trades, but very profitable.

However, setting a higher max on the (c-l)/(h-l) criteria gives a bit more erratic picture. With this indicator set at max 0.33 we get this equity chart:

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What is the “Bottom of the Range Trading Strategy”?

The “Bottom of the Range Trading Strategy” is a trading approach that involves specific criteria to identify trading opportunities when the asset is finishing weak and low for the day. It uses a formula (c-l)/(h-l), known as the IBS (Internal Bar Strength), and other conditions to make trading decisions.

What are the conditions for executing trades in the Bottom Of Range Trading Strategy?

To enter a trade using this strategy, two conditions must be met: The IBS must be lower than 0.1, and today’s closing price must be higher than yesterday’s. Trades are entered on the close and exited on the close after 3 days.

What are the results of backtesting this strategy?

Backtesting this strategy from January 2005 until the present shows a 10.69% return with 14 trades, of which 12 were winners, and an average gain of 0.76%.

How does the Bottom of the Range Trading Strategy identify potential trade opportunities?

The strategy identifies trade opportunities by utilizing a formula called the Internal Bar Strength (IBS), which calculates (c-l)/(h-l), where c represents the close, h represents the high, and l represents the low of the trading day. It also requires today’s closing price to be higher than yesterday’s.

What are the specific conditions that must be met to enter a trade using the Bottom of the Range Trading Strategy?

Trades are entered if the IBS is lower than 0.1 and today’s closing price is higher than yesterday’s. Entry occurs at the close, and trades are exited after 3 days.

Can you provide insights into the performance of the Bottom of the Range Trading Strategy based on historical data?

Historical backtesting from January 2005 until now reveals a 10.69% return with 14 trades. Out of these trades, 12 were winners, with an average gain of 0.76%.

What is the significance of backtesting in evaluating trading strategies like the Bottom of the Range Trading Strategy?

Backtesting allows traders to assess the effectiveness of a trading strategy by simulating its performance using historical data. It helps in understanding potential returns, win rates, and risk management aspects.

How does adjusting the criteria for the IBS affect the performance of the Bottom of the Range Trading Strategy?

Adjusting the criteria for the IBS, such as setting a higher maximum value, can impact the strategy’s performance. It may result in a more erratic picture, potentially altering the equity chart and trade outcomes.