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To maximize your returns and minimize your risk, allow the market's natural moves to happen and use sound stop placement principles based on what the market says, not what you think.
- John Novak | |
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Today's Featured Article
A Brazilian broker and trader, Vicente M. Nicolellis, Jr, developed range Bars in 1995.
The purpose of Range Bars was to focus only on changes in price; thus they do not close at a specific time, but instead only when the range is complete. Each bar has a specified price range, rather than being charted in units of time or ticks. With a focus on price movement, long periods of consolidation may be condensed into just a few bars, removing excess noise in the market and highlighting "real" price movements. So it is possible that an entire month of daily bars could fit into a single Range Bar, and the next month would have 30 Range Bars. (1)
Range Bars are built by the underlying closing data that shows the directional trends as per the range amount. Range Bar charts are time independent so that time axis increments will not be fixed. The size of the bars will always be the range size set by you and will never be anything smaller or larger unless it is the current bar that is building.
Range Bars look like standard bars, but are different in four ways: - Range Bars are all equal in height, based on the Range specified by the user.
- The open of each Range Bar is always equal to the close of the previous Range Bar. This is the primary difference between Range Bar and Momentum Bar charts.
- Range Bar closes are always at the top or bottom of the bar.
- Range Bars charts have no gaps.
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In this example of the S&P mini, the Range Bar chart is using a Range of 1:
If you cannot view the example above,
go here.
How a Range Bar is Built
Since price movement drives Range Bars, a new Range Bar is only created once the specified Range has been met. For example, if the specified Range amount is $10, it means that each Range Bar will have a range (High to Low) of $10. It is thus conceivable that a single Range Bar could represent several days if the movement throughout those days was only within a $10 price range. Once a Range Bar is closed-out, the open of the next Range Bar will always be at exactly the same price as the Close of the prior Range Bar.
How to use Range Bars to Trail Stops in a Trend
First we must create a buy signal and it will have 3 criteria:
- Trend up as defined by higher highs or higher lows
- Crossover on indicator
- Bullish reversal bar up from indicator
Here is an example long trade from overnight trading of the ES on May 7, 2009:
If you cannot view the above example, go here.
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How to place and trail stops using range bars
The initial stop will be placed 2 ticks below the entry bar. Since the range bars all have an equal range of one point this will limit your stop size to no more than 6 ticks worth of risk ($75 dollars trading the S&P mini).
You will remain in a trade as long as you have not been stopped out. To trail the stop you will follow a simple two-step process.
- Wait for the market to put in a down bar (close lower than prior close). There may be more than one down bar in a row, which is ok as long as you are not stopped out.
- Once you get a new up bar (close higher than prior close) you will trail your stop behind the new up bar.
This is what the trailing stops will look like allowing you to remain in a position to maximize your profits.
In this example of the S&P mini, you will see how the stop was trailed behind each new higher reversal up giving you the potential to have netted 4.75 SP points pre market:
If you cannot view the above example,
go here.
Conclusion
Range bars are a very simple and very effective way to filter out noise in the market and when the noise is filtered, you have the ability to trail your stops behind true swings in the market and maximize your potential and limit your risk.
Reference:
(1) Tradestation Help Guide (2009, April).
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About the Author
John Novak
is President of Nexgen Software Services Inc. John is the developer of the T-3 Fibs ProTrader indicator package. He has been involved in the marketing and distribution of Technical analysis software for the last 13 years. He has devoted the last 10 years to the automation of a popular discretionary methodology that he taught in seminars for over 2 years to many successful traders that was centered on Fibonacci analysis of both time and price. With the help of his software programmers they have automated this entire Fibonacci process into a fully automatic program. He spends his days working on constant improvements in his analysis in predictive indicators for traders and spends
the day trading his own methods. | |
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