Vicente Nicolellis, a Brazilian trader and broker who spent over a decade running a trading desk in Sao Paulo, invented Nicolellis range bars in the mid-1990s. The local markets were quite turbulent at the time, and Nicolellis grew interested in devising a means to profit from the volatility. He thought that price movement was critical to understanding (and profiting from) volatility. As a result, Nicolellis devised the concept of range bars, which take simply price into account, removing time from the equation.
What is the Range Bar Trading Strategy?
The range bar chart is a sort of time-independent pricing chart. Instead, the chart is designed to show a specific range of price fluctuations, independent of how long it takes for the price to move. Unlike more traditional chart kinds that print price bars based on time, such as candlestick charts and bar charts, range bars are displayed only when the price movement has fulfilled the set range size.
An hourly candlestick chart, for example, depicts price activity for each 1-hour time period during a trading day, but each bar on a daily chart indicates activity for one trading day. The price moves in both the price and time axes, and it moves by the same standard time interval in both. Time-based charts will always print the same amount of price bars over a given period in a non-stop market, such as the crypto market — 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 element.
Range bar charts, on the other hand, can have any number of bars produced over a given period. The number of bars printed would be determined by the set range size and market volatility: for any given range size, more bars would appear on the chart during times of higher volatility, while fewer bars would appear during times of lower volatility. As a result, the time axis in a range bar chart (though drawn to give price data for calculating the range bars) is superfluous. The range bars are printed based on the trader’s set range size, not on time movement.
Trading with Range Bars
Price can be viewed in a “consolidated” form using range bars. Much of the noise generated when prices oscillate within a limited range can be reduced to a single or two bars. This is because a new bar will not print until the entire defined price range has been met, which assists traders in determining what is actually happening with price.
Range-bar charts are excellent for drawing trendlines since they eliminate much of the noise. Horizontal trendlines can be used to show areas of support and resistance, while up-trendlines and down-trendlines can be used to highlight trending periods.
What are the range bar trading strategy’s rules?
There are rules that can be derived from the range bar chart based on the nature of range bars and the way it records solely price movement. These are the most important:
- Only after the price has changed the set range size does the chart display a bar: That is, if the range size is set to 30 points, the chart will print a bar after the price has moved 30 points in any direction.
- Each bar has a high and low value that is determined by the input price level: A range’s size is measured from low to high or vice versa.
- A new range bar appears outside the previous bar’s high or low: This indicates that the price has moved higher or lower than the previous bar in order for a new bar to be opened. However, because the new bar can move in any direction, two bars can virtually touch.
- A range bar closes at either the high or low: As a result, a range bar can have either one wick or none at all. It can never have two wicks because the high, low, and close are all the same. As a result, if a price trends lower but fails to complete a range and then climbs to close higher, it will have a smaller wick. The inverse produces a higher wick.
Range Bar Trading Strategy Pros & Cons
Pros
- It eliminates tiny price movements, making the trend visible.
- You can choose the size of your range based on your approach and market volatility.
- Support and resistance levels are plainly discernible.
- You can use range bars to trail your trend-following trade – two bars below the price is a frequent way.
Cons
- It is tough to determine the appropriate size of the range bar for best outcomes.
- Because the range bar chart is not widely available in some trading systems, you may have to make it yourself using custom indicators.
- The range bar chart just eliminates the time factor; it does not address the volatility issue. Depending on the brick size, range bar charts can appear choppy or not print any bars at all when the market is tumultuous.
Conclusion
Range bars, while not a technical indicator, can be used to discern patterns and understand volatility. Because range bars analyze only price and not time or other considerations, they provide traders with a unique perspective on price behavior. Spending time studying range bars in action is a good approach to find beneficial settings for a specific trading instrument and trading style, as well as how to apply them effectively to a trading system.
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