The Bottom Of The Range Trading Strategy (Range-Bound Trading)

During my early days as an investor/trader in the early 90’s, I was told (in many books) that an up day that finishes near the low of the range is a bad sign. Is this true? The only way to find out is by backtesting. Backtesting is the core of what we do and we believe backtesting works.

Let’s test a trading strategy:

The Bottom Of The Range Trading Strategy

Here is the strategy:

• (c-l)/(h-l) (the IBS) must be lower than 0.1.
• Today’s close must be higher than yesterday’s.
• If the above conditions are met, then enter on the close.
• Exit on the close after 3 days.

Here is the result:

%	#trades	#wins	Avg
10.69	14	12	0.76

The test period is from January 2005 until the present. Here is the equity chart:

After Hanna’s study, this setup has occurred 4 times until the present with these trades: 0.17%, 0.9%, 0.7% and 1.52%. Few trades, but very profitable.

However, setting a higher max on the (c-l)/(h-l) criteria gives a bit more erratic picture. With this indicator set at max 0.33 we get this equity chart:

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FAQ:

– What is the “Bottom of the Range Trading Strategy”?

The “Bottom of the Range Trading Strategy” is a trading approach that involves specific criteria to identify trading opportunities. It uses a formula (c-l)/(h-l), known as the IBS (Internal Bar Strength), and other conditions to make trading decisions.

– What are the conditions for executing trades in the Bottom Of Range Trading Strategy?

To enter a trade using this strategy, two conditions must be met: The IBS must be lower than 0.1, and today’s closing price must be higher than yesterday’s. Trades are entered on the close and exited on the close after 3 days.

– What are the results of backtesting this strategy?

Backtesting this strategy from January 2005 until the present shows a 10.69% return with 14 trades, of which 12 were winners, and an average gain of 0.76%.