Wednesday, May 12, 2010

Dear Range Bars - We're Over

I've been really getting back to basics... deconstructing my rule sets and allowing the idea of flexibility back into my trading. One of the things I have been focusing heavily on is risk reduction. Which brings me to range bars. I really like the logic behind them but i've found that the reality of trading with them can be less idealistic than the portrait usually portrayed. If you listen to providers like EOTPro (nothing against them!) range bars are going to usher in a new wave of consistency and reliability for retail traders because its "new technology". But I have a few complaints.

Straight up - my entries surround an engulfing pattern of some kind. I want to see price close higher or lower than the previous candle. At the most basic fundamental level I see this simple interaction as an indicator of buyers and sellers shifting power. Not perfect, but I dare you to find a shift from buyers to sellers or vice versa where this doesn't happen - not to spoil it for you, but you can't because this has to occur for price to reverse. This in no way means that the pit isn't going to try and f**k with you or that your just getting faked in too early, but this pattern HAS to occur so i've chosen to focus on it as a baseline.

Now the tricky part is getting a shift at a "good price" where you can have a reduced risk profile. By definition a range bar is almost always going to get you in later because your requiring the market to move X amount of bars in favor before you get a confirmed close and a new bar. My hypothesis is that by getting in at the range bar price you're already too late to the party. It typically occurs after the move is already well established and doesn't have a lot left in it before it stops and backfills either to reverse or continue on. Either way its much harder to hold for gold when a position is against you than when you've got a stop at par. Period. End of story.

One of the blogs I follow continually is The Deucalion Viewpoint. What always amazes me about Sandy's performance is that he can walk in and nail 20 ticks like its nothing. And when you deconstruct his entries a bit you can see one of the key reasons he can do this is because his entries aren't late - they aren't after the move is already established its always right around the tipping point. He has small risk, and thus he can take her +15-20 easily out of a swing. Moreover, when things look like they are going to get nasty for you by being in "earlier" you are taking a minimal loss of a tick or two bailing on a position rather than a -7 tick loss.



Again, this is only theory but today in practice it paid dividends. I only traded two markets *GASP* (I know right?) the 6E and the 6B, was in and out with less risk on every trade than 1 normal trade off my range bar charts and got almost 2:1 on every trade. Now its just sim, and this is like trader 101 stuff, divergences and not fighting the trend too much with crisp entries and I can already tell you I think i'm done with range bars for good.

So moving forward i'm going to try and keep everything BARE BONES SIMPLE. A little divergence, some simple patterns and some logical management combined with a much better chance of getting more than I risk sounds like a fairly good recipe for now.

Cheers!

9 comments:

Sandy said...

LOL...Sandy is a he, not a she..ha ha. Man...that's gonna get a few laughs at the pub tonight.

Secondly, I rarely "nail" anything. Sometimes..yes and that is the idea but in a fragmented pattern with unstructured pullbacks I may decide to scalp the trade rather than let it comeback all the way...

But the main point of getting early is right on. The way I see it is that I have an idea what to do before the setup happens...then I just wait for it...if it pans out I win...but if it doesn't I get proven wrong quicker (which maybe often BUT if I am right the reward is larger). Which you identified correctly.

Anyway, that's the idea.

Matt said...

lol! My bad Sandy! The post has been amended!

TST said...

I have experience with range chart its difficult to draw proper trend line on range chart. I think the best is use combination of tick chart and minute chart.

Matt said...

Agreed! I too found it almost impossible to draw a good trend line with range bars.

Games, Entertaiment, Hobby, said...

pw Top 100 Private Server Online

order flow trading said...

Great Charts. Thanks for the technical perspective and the data points

order flow trading said...

I love to read interesting post that has knowledge to impart! Thank you for sharing your insights! I will avidly wait for your next blog entry.

archie mishra said...

epicresearch.co also provides details on stock market through a chart for easy understanding.

michale wong said...

Hey, I want to do KLSE Stock Analysis, so can you teach me how to read charts and all.