Range Bar Trading Strategy – Backtest and Tactical Insights

Most price charts are time-based in the sense that a price bar represents price movement over a specified period of time. However, there are other chart types that are not based on time but, rather, on a specified price movement size; one such chart is the range bar chart. So, what is a range bar trading strategy?

The range bar strategy is a type of strategy that is independent of time. Instead, the chart is built to represent a specified range of price movements regardless of how long it takes the price to make that movement. This filters out price movements that are smaller than the range size, making the trend easier to visualize. The range bar trading strategy, therefore, is a trend-following strategy.

In this post, we take a look at the range bar chart and how to use it in trading. We end the article with a backtest of the strategy.

What is the range bar trading strategy?

The range bar chart is a type of price chart that is independent of time. Instead, the chart is built to display a specified range of price movements regardless of how long it takes the price to make that movement. Unlike the more conventional chart types such as the candlestick and bar charts which print price bars based on time, range bars are printed only when the price movement has completed the specified range size.

For example, an hourly candlestick chart displays the price activity for each 1-hour time period during a trading day and each bar on a daily chart shows the activity for one trading day. The price moves both in the price and time axis, and in the time axis, it moves by the same standard time interval.

In a non-stop market like the crypto market, for instance, time-based charts will always print the same number of price bars over a given period — 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 factor.

On the other hand, range bar charts can have any number of bars printed over a given period. The number of bars printed would depend on the specified range size and the volatility of the market: for any given range size, during times of higher volatility, more bars will appear on the chart, but during periods of lower volatility, fewer bars will print.

So, the time axis (though plotted to provide the price data for calculating the range bars) is redundant in a range bar chart. The range bars are not printed based on time movement, but on the trader’s specified range size.

Since different markets have different volatility, the specified range size should vary from one market to another. A trader may choose a 100-point size for a range in one market and 50 points for another.

It also depends on whether the trader wants to trade intraday, swing, or position methods. An intraday trader will want to use a smaller size range than a swing trader to see the smaller intraday trend. If the price moves 99 points in a day and an intraday trader uses a 100-point range size, the chart won’t price a full bar all day, and the trader won’t see what to trade.

The range bar strategy is mostly used for trend following, as the range bars filter out small price movements so the trader can see the main trend. That is, price movements that are smaller than the range size are filtered out, showing the trend more clearly and keeping the chart neater. As with other chart types, bullish bars are often colored green or white, while bearish bars are colored red or black. This makes for easier visualization of the trend.

Where does it come from and what is its history?

Range bars were designed by a Brazilian trader and broker, Vincent Nicolellis in the mid-1990s. Nicolellis spent over a decade running a trading desk in Sao Paulo at a time when the local markets were very volatile. The unending high volatility prompted him to look for a way to use volatility to his advantage, so he developed the idea of range bars, which consider only price, thereby eliminating time from the equation.

Nicolellis believed that price was the most important aspect when analyzing a security. He designed range bars to remove time in the analysis of price movements, so he can easily differentiate between a range-bound market (which stays in one bar or a few bars around the same level) and a trending market where bars are continually moving in one direction. As the name suggests, the range bars show ranging price action within a specified range size.

What are the rules of the range bar trading strategy?

Based on the nature of range bars and the way it tracks only the price movement, there are rules that can be derived from the range bar chart. These are the main ones:

1. The chart prints a bar only when the price has moved the specified range size: That is, if the specified range size is 30 points, the chart prints a bar after the price has moved 30 points in any direction.
2. Each bar has a high and low that is defined based on the input price level: The size of a range measures from low to high or the other way around.
3. A new range bar opens outside the high or the low of the previous bar: This shows that the price has moved higher or lower than the previous bar to be able to open a new bar. But the new bar can move in any direction, so two bars can lie almost side by side.
4. A range bar closes at the high or at the low: So, a range bar can either have one wick or no wick at all. It can never have two wicks as either the high or the low and the close is the same. Thus, if a price trends lower but couldn’t complete a range and later rises to close higher, it will have a lower wick. The opposite gives an upper wick.

How do you trade with range bars?

The range bar chart is very unique. By specifying the size of the range bars, you can filter out much of the noise that occurs when prices bounce back and forth between a narrow range. Such price movements can be reduced to a single bar or two, as a new bar will not print until the full specified price range has been achieved. So, with the range bar chart, you can distinguish what is actually happening to the price.

There are many ways to trade range bars, but the common ones are trend following, momentum, and breakout strategies.

• Trend following: This strategy tries to ride the trend to its very end. Since range-bar charts eliminate much of the noise, they are very useful for trend-following strategies. You can easily apply a trendline on the range bars to show the trend. Also, you can use the range bars to trail your profits — you can set your trailing stop to trail the price some two range bars away.
• Momentum strategies: Swing traders who want to trade the individual impulse waves in the trend direction can use range bars to improve their accuracy. Range bars can show areas of support/resistance where a pullback might reverse to start a new impulse wave in the trend direction. Eve