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I am trying to come up with a high level definition of what a trading range is and oddly enough i find it hard to form an accurate definition of what it is. I thought some of you might help me solve this little problem. Basically i see a trading range as a box that contains price on a specific timeframe. There may be price probes outside the box but in these cases price must return within the box to keep the range intact or still active. However, the problem occurs when i try to define the start of a new range or when successive ranges overlap. Think about it as if you had to follow an algorithm or a step-by-step procedure. What steps would you follow to identify a trading range? When does a range start and end ? Try to be as precise as possible in your definition. Let's see if the collective intelligence of futures.io (formerly BMT) could come up with a good definition.
Many years ago I established my rules for trading ranges.
After establishing the high and the low for the trading range, I'll create its extension which have 3 areas, 25, 33.3 and 37.5% of the range. While prices won't close above or below the 37.5% extension I consider the range still intact.
For example, look at the simplest of the ranges, a 1 bar range.
After you have the confirmation of an inside bar, you have the confirmation of a 1 bar range and from there you just do the math.
You'll have your range high, your range low and after you calculate its range you just take the 25, 33.3 and 37.5% of it and add to the high and subtract from the low.
Only a close outside the 37.5% confirms that the range was broken and prices are now free to initiate a new movement.
You just need to establish your trading range and do the math.
I use the 25, 33.3 and 37.5% but you can use whatever percentages you want. Use what you feel more comfortable with.
I have no idea why but prices love the 25% extension.
If I become half a percent smarter each year, I'll be a genius by the time I die
Thanks Arnie, your definition is very similar to what Fat Tails does with his auction bars. But what about if you'd use a range or renko chart, how would you proceed to identify a trading range?
Following Arnie's train of thought, maybe define the start of the range by a retracement % or amount. Or maybe short term moving averages, e.g. 10 Hull/T3/LLMA crosses high/low then breakout, reset when ma turns back again and assume in range until broken again or something. Or an oscillator, e.g. in range until TSI crosses +/- 60, then trending one direction until crosses back over the opposite 40 line or something. Or use the swing indicator of a certain strength, possibly with buffer or short-term moving average cross.
Ideally, i'd like to get close to the definition PrivateBanker has presented in the ES thread. However, he seems to use a loosely defined definition. What i'd like to do is getting a more rigid definition that could be automated.
Getting 1 bar ranges from Renko or Range bars is really not an option here but you can go higher on the swing to get your range.
See how ES spent all day trading inside the first up swing of the day.
After 2pm the range was broken but prices did come back right in again.
In hindsight this is pretty easy to draw but let me say that after a while it becomes pretty easy in real time because when you see a rotation higher in size than the previous one you know that something have just changed and as soon you see another rotation now in favor of the previous move you set the previous high as the range high and the previous low as the range low and from there calculate the extensions and see what happen.
Of course if you're targeting ranges of 8 ticks or so you'll probably lose yourself on the calculations and when you look prices are long gone.
The rule of thumb here is the more time prices spend inside the range the more valid it is, hence, the probability of some kind of reaction over the extension area.
If I become half a percent smarter each year, I'll be a genius by the time I die
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I look at trading ranges in a variety of ways with all being fairly discretionary in the sense that there are no laid down mechanical rules. I build the picture from a large time frame and work it down into a micro level which will define trade locations. The macro being the high time frames with the micro being intra-day price levels that are relatively confluent with the bigger picture.
The first way I look for or at a trading range would be by simply creating brackets on the daily, weekly and monthly charts. These brackets are typically anchored at the base of the balancing bars while leaving the excess/tails out of balance which signal rejection areas vs. areas of acceptance. These are more of a visual confirmation vs. a trade location of course.
The second way of observing or creating a trading range is through a similar process of looking at the daily and weekly TPOs. Again looking for areas of acceptance and rejection.
The third way I look at trading ranges is through a simple observation of the current price channels in which we're trading in.
And lastly, a fourth way I look at a trading range is through various time frames' volatility observable through VWAP and its outer standard deviation levels.
Example of the monthly VWAP. You can see that we've been trading withing last month's VWAP area/value and are now breaking out higher to test the upper standard deviation levels. This move is coming from price finding support at the previous month's lower 1st SD close level and then being supported at the developing month's lower 1st SD level.