How To Determine Range Bar Settings For Share Market
For the past two weeks, we have been trying to analyze effective strategies which have proven to be highly useful in the stock market.
Last week we discussed in details about Charts and Indicators – along with their uses.
Through this post, we would be looking at the advantages associated with the use of Range Bars in these charts.
One of the most powerful ways to view the market is via range bars.
However, when you are determining the most appropriate range bar size for a market, you will need to go through some testing.
Moreover, you will also need to have some experience of trading in the market before you can expect to achieve some success.
Today’s post illustrates the steps that you will need to undertake for determining the appropriate range bar setting for a market.
Step 1: Determine the average value of ADR or Average Daily Range for a period of 3-6 months.
The market’s volatility and range value can change over time.
Although, it may not be a good idea to adjust the range bars every now and then when you see a change occurring in the market, it can be beneficial to assess and know if the range selected is normal for the market’s situation.
The best way to determine if the present ADR value is a typical value for the market is to go back one month at a time and compare the present ADR value with the ADR value in that month.
Step 2: Take the 10% ADR value to start with.
Fundamentally, the creation or appearance of a new bar is subject the range violation.
So, whenever a specified value of range is exceeded, you will see a new bar appears on the chart.
Consequently, if you have an excessively large range, it will not be exceeded every now and then.
As a result, you will end up with very few bars on the chart.
The trouble with having a low of bars is that your trading opportunities are extremely limited.
Moreover, you may not receive the signals on time, as a result of which you may lose out on a potential opportunity.
On the other hand, if you have a very small range bar setting, the range will be exceeded way too often and your chart will so full of bars that it will be difficult to comprehend.
In addition, trading in such an environment can be a challenging task for anyone in light of the fact that you may get false signals and what may seem like an opportunity at first may not be anything even close to the same.
This brings us to the fundamental question – what is the best range bar setting for a market?
Leaving the selection of range bar setting to individual understanding leads to confusion and uncertainty.
Therefore, we have decided to give you a numerical formula that determines the range bar setting for you.
So, you don’t need to speculate or guess.
All that you need to do is calculate and use the value.
Although, the most appropriate range bar setting differs from one market to the next, it has been observed that this value is typically 10% of the ADR value.
In this step, you calculate 10% of the ADR average that you computed in the last step and the result you get is the range bar setting for the market that you are trading in.
Going back to the example taken in the previous step – the average ADR value was calculated to be 141.667. So, the range bar setting for this ADR value will be 14.1667.
To show you the difference that this method of range bar calculation makes to our value, look at the value of ADR for July, which is equal to 200.
If we had not calculated the average and directly used the 10% value of July ADR, then the range bar setting would have been 20.
Although, this setting would have worked just fine for the market conditions in July, you will need to change/adjust the setting as soon as the month changes as the ADR value will not be the same.
When you take the average value, you can expect to use a range bar setting for a much longer time.
Step 3: Test Signals using the strategy discussed in the previous chapter.
Regardless of the method you use for determining range bar setting value, it is essential for you to remember that your end goal is to determine the setting, which can give you signals to enter the market when the market trend is at its best.
In addition, the trend should also be able to keep you away from sideways markets.
This step aims to conduct reviewing of signals and do additional testing to confirm that the setting is just the one you need.
Like I mentioned some time ago, you can expect to make money using the strategy we discussed even if the winning percentage is as low as 50-60%.
So, we are already keeping the fact that trades do not win all the time in mind.
All that you need here is a setting that can help you achieve a minimum winning percentage of 50-60%.
To ensure that the setting is working fine for you, you will need to test it under several different conditions.
However, as a rule, never test a setting for lesser than 40 trades.
In fact, the more trades you use, the better it will be for you.
Next week, we will be looking at Time Bars and how they have been proving to be extremely useful to chartists all over the world to determine the market trends.
Until then, stay tuned and read on at www.stockmarketsignals.com