Learn the best range trading strategy to avoid getting chopped in a ranging market. Markets spend most of their time in range zones so you need to have a trading process that embraces range trading. Throughout this guide, you’ll learn a new concept of range bars and the art of trading choppy market with the Bar Range indicator MT4.
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It’s a well-known fact that any type of market (stock, commodity, Forex currencies and cryptocurrencies) only trend for 20% of the time.
Now you might be thinking:
What’s the market doing for the remaining 80% of the time?
As you may guess, the rest of the time the markets are directionless.
The market is spending most of its time transitioning from trading ranges through retracements and other counter-trend action.
That’s why it’s important to learn how to trade range like a pro.
The 80/20 rule, also known as the Pareto principle states that 20% of the input will create 80% of the results (output). We can see how the 80/20 principle can explain market behavior. The 80/20 can also be seen in countless other instances throughout markets and the business world.
Moving forward, we’re going to spend some time introducing the concept of range bar charts and why some traders focus on range bars trading strategies.
But first, let’s understand what is range trading and why you shouldn’t be afraid of ranging markets.
What is Range Trading?
This will be a quick beginner’s guide to range trading. By taking the time to understand range trading, you’ll be able to develop a more effective trading strategy. Range trading strategies can be used in every market under almost every type of market condition.
As the name suggests, range trading is a strategy or a technique used to trade a range-bound market.
Let’s now give a comprehensive definition of what is a trading range?
A trading range takes place when a financial instrument (stocks, indices, bonds, commodities, Forex currencies or cryptocurrencies) oscillates between two upwards and downwards boundaries for a period of time.
Traditionally, the downwards and upwards boundaries are defined as support and resistance levels.
Range trading works best in the absence of a trend.
When the markets lack a clear direction, that’s when these consolidation periods settle in.
The range trading strategies seek to fade the extremes of the range.
In other words, we’re looking to buy at the bottom of the range. Inversely, we’re looking to sell at the top of the range.
Alternatively, more experienced traders can look for trading range breakouts. This type of trading strategy can give you quick profits as we’re trading on the back of strong momentum.
To open a trade inside a trading range, you need to time your entry.
Traders can time range based entries by looking for clues that the support and resistance level is going to hold. In a range market environment, the overbought and oversold indicators work the best to time the range based entry.
Now, which type of trading style you should choose between range trading vs trend trading?
It really depends on your trading goals and your personality. The trading strategy that is right for one trader may not be what’s best for another.
Remember, that your trading strategy should fit your personality.
However, you still need to be equipped with the right tools to tackle the inherent risk that comes with online trading.
So, we’re going to reveal to you how to trade ranges using the Bar Range indicator MT4.
Most traders are only familiar with trading based on bar charts or candlestick charts, which factors in the time element.
If you want to upgrade your style and learn new trading tools and techniques we’ve got your back.
Below we introduce the power of range chart.
What are Range Bars?
Range bars are a convenient replacement of the most popular types of charts (bar chart, line chart, and candlestick chart). Range bars are used in technical analysis the same way as any other form of charting technique.
These bars provide traders with a visual representation of the market price action.
For instance, with a time-based chart, each 5-minutes bar shows you the price activity for each 5-minute time period. These time-based charts will always print the same number of bars during each trading session regardless of volatility, volume or any other factor
The first thing to note about range bar is that they take only the price into consideration.
Effectively, we’re eliminating the time element. Time can always be adjusted later on.
So, how are the bars than created?
Each bar represents a specified movement of the overall price.
In other words, the range bar doesn’t close at a specific time, but instead only when a range is completed.
The size of the Forex range bar is specified by the trader.
For example, if you have a 100 pips range selected, each of these range bars is going to be equivalent to that range. So, each of these range bars is equivalent to 100 pips.
Range bars are very similar to Renko bars.
In order to use a profitable Renko strategy, you really need to understand the basic foundation of a Renko block. See here: Profitable Renko Strategy – Building your Account, One Brick at a Time.
Both Range bars and Renko bars remove the time element to focus on the price, isolating the trend.
So, what is the difference between range bars vs Renko bars?
The Renko box is printed on the chart only when the price moves all in one direction from the opening price of the previous brick.
There is no clear answer to which one is better.
Both range bars and Renko bars serve their own technical purposes. You may want to consider using both types of bars while trading.
Let me explain how range bars are formed.
Range Bars Example – How Range Bars are formed
For instance, if you select a 100 pips range bar and the EUR/USD exchange rate moves from 1.1100 to 1.1180, then 1.1180 to 1.1100, then 1.1100 to 1.1180 during a 3 day period this is what you get:
Basically, you get a bar that goes from 1.1100 to 1.1180 during a 3 day period and this bar is not closed yet.
By eliminating the time factor, we can better identify trading ranges.
Let’s go one step forward and assume the EUR/USD exchange rate has now moved to 1.1200.
In this case, the range bar closes and a new bar is printed with the opening price at 1.1200. This new bar must have a 100 pips range to close.
These range bar examples are self-explanatory.
Now, knowing how range bar came to life will give you a much deeper understanding of this ranging indicator.
Below you have a brief history of range bars:
How Range Bars Were Developed?
In 1995, Vicente M. Nicolellis Jr., a trader from Brazil, developed an innovative technique of charting price bars. The innovation of range bars came as a solution to tackle the high volatility in his local markets in Sao Paulo.
Nicolellis need a better approach, so he decided to eliminate the time element from the price chart.
Without the time variable, our famous trader from Brasil was able to focus purely on price.
As the saying goes the price is king when it comes to the market.
And, range bars bring back the focus on the underlying price movement.
Range bars are also known among professional traders as the Nicolellis range bars.
Traders around the world have learned to recognize the ranger bar advantages over the time-based charts.
When Range Bars Work the best?
Trading with range bars works the best when we have time periods of congestions or price consolidation zones. Using range bars we eliminate a lot of the day to day market noise by smoothing the price action.
See the range bar chart below:
A lot of the false signals that come with the time-based chart analysis have been eliminated.
Time-based charts will always post the same number of bars during each trading session regardless of volume, volatility or any other factors.
The only time you’ll see more range bars printed on the charts is when we have periods of higher volatility.
But even then it’s dependent on the range bar size selected by the user.
Inversely, when we have low volatility, you’ll see fewer range bars printed on the chart.
Let me give you some of the advantages that come with a range bar chart analysis.
Why you Should Trade with Range Bars?
Here are the key takeaways to keep in mind when trading with range bars:
- All range bars are uniform in size because the range is constant
- The size of the bar is customizable, based on the trader’s needs
- Range bars open and closes always at the top and the bottom of the bar
- The time period covered by each bar is irrelevant as range bar charts are time-independent
Range bars can help us identify ranging price action in a blink of an eye.
Potential support and resistance levels are more clearly visible on the chart.
If you ever struggled with trade management strategies, try using ranging bars.
Range bars are also an effective tool to time your entry and exit points.
The most important advantage of range bars chart is that by eliminating the time factor, range bars become highly effective when used in combination with other technical indicators like oscillators.
Learn more about the different types of oscillator indicators here: Best Forex Indicators to Generate Buy and Sell Signals.
Now that you’re familiar with how to calculate range bars and the advantages behind MT4 Range Bar indicator, let’s develop a range trading strategy.
Best Range Trading Strategy
In this section, you’ll learn a simple range trading strategy.
Range bars can help us identify support and resistance levels with the precision of a surgeon.
That explains why this is the best range trading strategy.
Once we have identified the support and resistance level, we let the market do his thing
Note* For the purpose of this range bar strategy we’re using a range bar size of 5 pips. This means each bar is printed once we traveled at least 5 pips in one or the other direction.
Once the resistance level is tagged by the range bar we wait for price formation that includes 3 countertrend bars.
You just need to open a new position when the fourth bar is printed on the chart.
The three consecutive countertrend bars simply show range expansion trading.
This is a clear shift in the trend direction.
Let’s zoom into the previous chart:
The protective stop-loss order can safely be placed above the 3 range bar pattern. Stop losses are one of the most effective ways for traders to control their exposure to risk.
Let’s now learn how to trade range bars using indicators.
We’re only going to use the MFI indicator.
For more info on how to use the Money Flow Index check: Money Flow Index – Trading like the Banks.
Through this range bar trading strategy we’re going to use the MFI indicator to confirm the buying and selling pressures behind the range bar expansion.
For example, when the range bar expands on the upside, we want to make sure this is due to buying activity.
We’re just using the MFI indicator as a confirmation tool.
See the range bar chart example below:
Final Words – Bar Range Indicator MT4
If you’re tired finding success with the traditional candlestick price chart you’ll find some value in doing some research and backtesting the range bar tool. If you’re looking for a more all-inclusive range trading strategy with an effective tool to time your entries and exit points you’re way better off using the Bar Range indicator MT4.
With the best range trading strategy, you have the ability to see the market structure a little bit more clearly. If the market doesn’t move, there are no trading opportunities. If there are no trade opportunities, then we can’t make money. The range bar tool helps us identify when a trading opportunity shows up.
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