Internal Bar Strength (IBS) is an idea that has been around for a while, and the indicator seems to have performed amazingly well for more than 20 years. Swing traders constantly strive to anticipate and profit from short- and medium-term price changes, and the internal bar strength indicator significantly aids them in this endeavor.
We can only speculate, but given that the stock market has been extremely mean-reverting over the past 20 years and that the IBS approach is mean-reverting as well, the cause may not be too far off. The IBS supports mean-reversion swing trading by assisting you in buying on weakness and selling on strength.
We’ll examine the Internal Bar Strength Indicator in this piece, including how it’s generated, how it’s performed through time, which markets it performs best in, and the results of combining it with other indicators.
What is the Internal Bar Strength Indicator?
The Internal Bar Strength oscillator assesses the position of the close relative to the high-low range of the current trading session. IBS is based on the position of the day’s close in respect to the day’s range, for instance, using the daily sessions. Is the day’s closing price relatively close to either the day’s high or low?
The value shows how close the closing price is to the high and low and fluctuates between 0 and 1. If the market is indeed mean-reverting, the market signal will be more bullish, at least in the medium term, the lower the IBS value (the closer to 0 the value is). On the other hand, the more significant the value (closer to 1), the more negative the short-term market signal will be.
The IBS effect is the subject of numerous theories. One of them is the possibility that it has anything to do with the market’s attempt to rectify intraday overreaction to news or market movements. The dead cat bounce effect is another.
Internal Bar Strength Strategy
The Internal Bar Strength indicator is a relatively straightforward technical metric that oscillates between 0 and 1. Typically, an exit signal is generated when the IBS rises above 0.8 and a buy signal is generated when the value is below 0.2.
The indicator is drawn in the indicator box on the chart for manual trading. The decimal values of the IBS values are multiplied by 100 to produce the percentage values. Thus, the IBS value in this instance fluctuates between 0 and 100. The indicator gives a buy signal when it drops below 20, and a close signal when it rises above 80.
IBS Indicator Pros & Cons
The IBS indicator can help traders develop their own trading system by providing a framework for identifying potential trend changes and overbought/oversold conditions in the market. It can also be used in conjunction with other technical indicators to confirm trading signals and reduce the risk of false signals.
Pros
- It is based on the analysis of multiple technical indicators, which can provide a more complete picture of market conditions.
- It can help traders identify potential trend changes and overbought/oversold conditions in the market.
- It can be used in conjunction with other technical indicators to confirm trading signals.
Cons
- It is a momentum-based strategy, which means it may produce false signals in choppy or sideways markets.
- It may produce conflicting signals if different technical indicators are giving different signals.
- It is only effective in trending markets, and may not be as effective in range-bound or sideways markets.
Conclusion
IBS, a mean-reverting indicator, contrasts the current price with the price range for the period. The indicator fluctuates between zero and one as it calculates the closing price’s position in relation to the high and low.
A low internal bar strength value is regarded as a bullish signal in the short term, while a high value is regarded as a bearish signal. The IBS is thus just a tool that aids in buying on weakness and selling on strength, which forms the cornerstone of every mean-reverting strategy. But this is based on the supposition that the market is mean-reverting.
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