A Different View Of The Markets

Nicolellis range bars were developed in the mid-1990s by Vicente Nicolellis, a Brazilian trader and broker who spent over a decade running a trading desk in Sao Paulo. Local markets at the time were very volatile, and Nicolellis became interested in developing a way to use volatility to his advantage. He believed that price movement was key to understanding (and profiting from) volatility. Thus, Nicolellis developed the idea of ​​range bars, which only consider price, thus eliminating time from the equation.

Calculation of range bars

Nicolellis found that bars based solely on price, not time or other data, offered a new way to visualize and use financial market volatility. Most traders and investors are familiar with time-based bar charts. For example, a 30-minute chart shows price activity for each 30-minute period during a trading day and each bar on a daily chart shows activity for one trading day. Time-based charts will always print the same number of bars during each trading session, trading week, or trading year, regardless of volatility, volume, or any other factor.

Range bar charts, on the other hand, can have any number of bars printed during a trading session: during periods of higher volatility, more bars will appear on the chart, but during periods of lower volatility, fewer bars will be printed. The number of range bars created during a trading session will also depend on the instrument being charted and the price movement specified for each range bar.

Three range bar rules:

• Each range bar must have a high/low range equal to the specified range.
• Each range bar should open outside the high/low range of the previous bar.
• Each range bar must close at its highest or its lowest.

Range Bar Settings

Specifying the degree of price movement to create a range bar is not a one-time process. Different trading instruments move in different ways. For example, a higher priced stock such as Google (GOOG) may have a daily range of $20 or $30; a cheaper stock, such as Blackberry Limited (BB), might move only a fraction of that in a typical day. Blackberry Limited is the company formerly known as Research In Motion (it is named as such in the tables below). It is common for higher priced trading instruments to experience larger average daily price ranges.

The graph below shows both Google and Blackberry with 10 cent range bars. Half of the trading session (9:30 a.m. to 1:00 p.m. EST) for Google can barely be compressed to fit on a single screen because it has a much larger daily range than Blackberry, and therefore many more 10 cent range bars are established.

Google and Blackberry provide an example for two stocks that trade at very different prices (a high and a low), resulting in distinct average daily price ranges. It should be noted that while it is generally true that high priced trading instruments may have a larger average daily price range than lower priced ones, instruments trading at roughly the same price may have very different levels of volatility, as well. Although we can apply the same range settings at all levels, it is more useful to determine an appropriate range setting for each trading instrument.

One method to establish appropriate parameters is to consider the average daily range of the trading instrument. This can be accomplished by observation or by using indicators such as the Average True Range (ATR) on a daily chart interval. Once the average daily range has been determined, a percentage of that range can be used to establish the desired price range for a range bar chart.

Another consideration is the style of the trader. Short term traders may be more interested in smaller price movements and therefore may be inclined to have a smaller range bar. Longer term traders and investors may require range bar settings based on larger price moves.

For example, an intraday trader may observe a range bar of 10 cents (0.01) on McGraw-Hill Companies (MHP). This would allow the short-term trader to monitor large price movements that occur during a trading session. Conversely, an investor might want a range bar setting of one dollar (1.0) for the same security, which would help reveal price movements that would be important to the trading style and longer term investment.

Trade with Range Bars

Range bars can help traders visualize price in a “consolidated” form. Much of the noise that occurs when prices bounce in a tight range can be reduced to a bar or two. This is because a new bar will not print until the specified price range has been filled, and helps traders distinguish what is really going on with the price.

Since range bar charts remove much of the noise, they are very useful charts to draw trend lines on. Support and resistance areas can be highlighted by applying horizontal trend lines; trending periods can be highlighted through the use of uptrend lines and downtrend lines.

For example, the chart below shows the trend lines applied to a 0.001 bar chart of the Euro vs US Dollar (EUR/USD) currency pair. Horizontal trend lines easily outline trading ranges, and price moves that cross these areas are often powerful. Generally, the more the price bounces between the ranges, the more powerful the move can be once the price breaks through. This is believed to be true for contacts along bullish trendlines and bearish trendlines: the more the price touches the same trendline, the greater the potential movement once the price breaks through the bar.

The chart below illustrates a price channel drawn as two parallel bearish trend lines on a Google range bar chart. We have used a range bar here, where each bar equals $1 of price movement and which better eliminates the “extra” price movements that were seen in the first chart using a range bar setting of 10 cents . Since some of the price consolidation movement is eliminated by using a wider range bar setting, traders may be able to spot changes in price activity more easily. Trendlines naturally fit range bar charts; with less noise, trends can be easier to detect.

Interpreting volatility with range bars

Volatility refers to the degree of price movement in a trading instrument. As the markets are trading within a narrow range, fewer range bars will print, reflecting reduced volatility. As price begins to break out of a trading range with increased volatility, more range bars will print.

Through observation, a trader can notice the subtle changes in the timing of the bars and the frequency with which they print. The faster the bars print, the greater the price volatility; the slower the bars print, the lower the price volatility. Periods of increased volatility often mean trading opportunities as a new trend may begin.

The essential

Although not a technical indicator, range bars can be used to identify trends and interpret volatility. Since range bars only take into account price, not time or other factors, they provide traders with a unique view of price activity. Spending time observing range bars in action is the best way to establish the most useful parameters for a particular trading instrument and trading style, and to determine how to effectively apply them to a trading system.