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. The local markets at the time were very volatile, and Nicolellis became interested in developing a way to use the volatility to his advantage. He believed price movement was paramount to understanding and using volatility. He developed Range Bars to take only price into consideration, thereby eliminating time from the equation. Nicolellis found that bars based on price only, and not time or other data, provided a new way of viewing and utilizing the volatility of the markets. Today, Range Bars are the new kid on the block, and are gaining popularity as a tool that traders can use to interpret volatility and place well-timed trades. (For a primer on technical analysis, check out the Technical Analysis Tutorial.)

Calculating Range Bars
Range bars take only price into consideration; therefore, each bar represents a specified movement of price. Traders and investors may be familiar with viewing bar charts based on time; for instance, a 30-minute chart where one bar shows the price activity for each 30-minute time period. Time-based charts, such as the 30-minute chart in this example, will always print the same number of bars during each trading session, regardless of volatility, volume or any other factor. Range Bars, on the other hand, can have any number of bars printing during a trading session: during times of higher volatility, more bars will print; conversely, during periods of lower volatility, fewer bars will print. The number of range bars created during a trading session will also depend on the instrument being charted and the specified price movement of the range bar.

Three rules of range bars:

  • Each range bar must have a high/low range that equals the specified range.
  • Each range bar must open outside the high/low range of the previous bar.
  • Each range bar must close at either its high or its low.

Settings for Range Bars
Specifying the degree of price movement for creating a range bar is not a one-size-fits-all process. Different trading instruments move in a variety of ways. For example, a higher priced stock such as Google (Nasdaq:GOOG) might have a daily range of seven dollars; a lower priced stock such as Research in Motion (Nasdaq:RIMM) might move only a percentage of that in a typical day. It is common for higher priced trading instruments to experience greater average daily price ranges. Figure 1 shows both Google and Research in Motion with 10 cent range bars. One half of the trading session (9:30am - 1:00pm EST) for Google can barely be compressed to fit on one screen since it has a much greater daily range than Research in Motion, and therefore many more 10 cent range bars are created.

Figure 1: These charts compare two trading instruments\' daily activity shown with 10 cent range bars. Notice how the Google chart has many more 10 cent range bars than Research in Motion. This is due to the fact the Google typically trades in a greater range. Only half of the trading session for Google could be squeezed into the upper chart; the entire trading session for Research in Motion appears in the bottom chart.

Google and Research in Motion provide an example for two stocks that trade at very different prices, resulting in distinct average daily price ranges. It should be noted that while it is generally true that high-priced trading instruments can have a greater average daily price range than those that are lower priced, instruments that trade at roughly the same price can have very different levels of volatility as well. 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. (Learn more about the ATR in Measure Volatility With Average True Range.)
Another consideration is the trader's style. Short-term traders may be more interested in looking at smaller price movements, and, therefore, may be inclined to have a smaller range bar setting. Longer-term traders and investors may require range bar settings that are based on larger price moves. For example, an intraday trader may watch a 10 cent (.01) range bar on McGraw-Hill Companies (MHP). This would allow the trader to watch for significant price moves that occur during one trading session. Conversely, an investor might want a one dollar (1.0) range bar setting for McGraw-Hill (MHP). This would help reveal price movements that would be significant to the longer-term style of trading and investing.

Trading with Range Bars
Range bars can help traders view price in a "consolidated" form. Much of the noise that occurs when prices bounce back and forth between a narrow range can be reduced to a single bar or two. This is because a new bar will not print until the full specified price range has been fulfilled. This helps traders distinguish what is actually happening to price. Because range bar charts eliminates much of the noise, they are very useful charts on which to draw trendlines. Areas of support and resistance can be emphasized through the application of horizontal trendlines; trending periods can be highlighted through the use of up-trendlines and down-trendlines. Figure 2 shows trendlines applied to a .001 range bar chart of the euro/US dollar forex pair. The horizontal trendlines easily depict trading ranges, and price moves that break through these areas are often powerful. Typically, the more times price bounces back and forth between the range, the more powerful the move may be once price breaks through. This is considered true for touches along up-trendlines and down-trendlines: the more times price touches the same trendline, the greater the potential move once price breaks through.

Figure 2: This .001 range bar chart of EUR/USD illustrates the effectiveness of applying trendlines to range bar charts.

Figure 3 illustrates a price channel drawn as two parallel down-trendlines on a 1 range bar chart of Google. We have used a 1 range bar here (where each bar equals $1 of price movement) which does a better job of eliminating the "extra" price movements that were seen in Figure 1 using a 10 cent range bar setting. Since some of the consolidating price movement is eliminated by using a larger range bar setting, traders may be able to more readily spot changes in price activity. Trendlines are a natural fit to range bar charts; with less noise, trends may be easier to detect. (For more on channels, see Channeling: Charting A Path To Success.)

Figure 3: This 1 Range Bar chart of Google illustrates a price channel created by drawing parallel down-trendlines. The move to the upside was substantial once price broke above the channel.

Interpreting Volatility with Range Bars
Volatility refers to the degree of price movement in a trading instrument. As markets trade in a narrow range, fewer range bars print, reflecting decreased volatility. As price begins to break out of a trading range with an increase in volatility, more range bars will print. In order for range bars to become meaningful as a measure of volatility, a trader must spend time observing a particular trading instrument with a specific range bar setting applied. Through this careful watching, a trader can notice the subtle changes in the timing of the bars and the frequency in 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 signify trading opportunities as a new trend may be starting.

While range bars are not a type of technical indicator, they are a useful tool that traders can employ to identify trends and to interpret volatility. Since range bars take only price into consideration, and not time or other factors, they provide traders with a new view of price activity. Spending time observing range bars in action is the best way to establish the most useful settings for a particular trading instrument and trading style, and to determine how to effectively apply them to a trading system.

For related readings, take a look at Advantages of Data-Based Intraday Charts and Trading Without Noise.

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