Range bars can be an alternative to time based charts. Time based charts are based on a particular time period such as 5 minutes, 15 minutes, one hour, 4 hours, daily, etc… Each time based chart will produce a set number of bars which corresponds to the timeframe selected. For instance, from 9:30 to 10:30 in the morning, a 5 minute chart would show 12 bars. The time based chart will always print the same number of bars even though volatility and volume may vary.
What is a Range Bar?
In comparison, a range bar is absent of time. Time is not a factor in the formation of a range bar.A range bar forms only frommovement in price of the underlying. There are not a set number of range bars which will print on a chart. The number of range bars is determined by the price movement of the underlying. When the market is very volatile, more range bars will print. If the market is moving slowly with less volatility, there will be fewer bars.
Each range bar is set to an increment whichindicates the same price value. For instance, a range bar in the ThinkorSwim trading platform can be set to a certain number of ticks. Let's use a number of 12 ticks. Each range bar will indicate price movement of 12 ticks. This helps to create a cleaner chart with less noise. Some traders may find less noise on the chart to be beneficial. Other traders may prefer to see the so-called noise because they feel the noise offers more clues in the price action.
Vicente M. Nicolellis, Jr. was the creator of range bars back in the mid 1990's.
Range bars can help traders when the market is consolidating. If the market is in a range moving sideways, a range bar will not print until a certain amount of price movement has occurred.
If you are the type of trader who wants help to avoid entering a trade when the market is moving sideways or channeling, the range bar may be an edge for you. You as a trader will be able to draw areas of support and resistance as well as trendlines as with a time chart. You can also use any indicators which youwould normally use.
Figure A: 12 Tick Range Bar chart vs. 5 Minute Time Chart
Above is a 12 tick range bar chart (left), and a 5 minute time-based chart (right). Notice the bars between the 2 vertical red lines on each chart. These vertical red lines indicate an approximate time period of one hour – 9:30 am to 10:30 am. Notice there are fewer bars which have printed on the range bar chart as compared to the 5-minute chart. /ES for this period of time had very little movement in price, so there were not many bars which printed on the range chart. The 5-minute chart shows price movement as well as each 5 minutes of time. Therefore, the 5-minute chart has more bars.
How to determine the range bar settings…
You as a trader can determine the range bar setting by observing how much price tends to move on the instrument. You can then set the ticks accordingly. Each tick represents one increment of price of the underlying instrument. Another option which Investopedia recommends is as follows: “While we could apply the same range bar settings across the board, it is more helpful to determine an appropriate range setting for each trading instrument. One method for establishing suitable settings is to consider the trading instrument's average daily range. This can be accomplished through observation or by utilizing indicators such as average true range (ATR) on a daily chart interval. Once the average daily range has been determined, a percentage of that range could be used to establish the desired price range for a range bar chart.”
If your platform offers range bars, you may want to give them a try. Range bars could provide the edge you have been searching for as a trader.
References used for this article are as follows:
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Feel free to comment below if you have anything to share on how range bars have helped your trading.