E-mini Trading: Learning To Trade With Range Bars

In recent articles I have been focusing on charts and current methodology for displaying market data on your e-mini trading chart. The vast majority of traders seem to focus their charting exposition on time-based trading bars. It seems to me that e-mini traders use time based charting techniques simply because they are popular, but it behooves a trader to explore other important and valid charting techniques that have some specific advantages in interpreting market data.

This article will focus on range e-mini charting techniques and some of the advantages of range bars. More specifically, range bars are based solely upon market price; time and volume are of no consideration in this methodology. Quite simply, range bars use only market pricing to display price action data. It is the traders responsibility to determine the specific range of each bar to be displayed. For our purposes we will be examining range bars relative to the ES and YM e-mini contracts.

Let's take a short moment and review the history of range charting. Nicolellis Range Bars were developed in 1995 by a Brazilian trader named Vincente M. Nicolellis. According to several sources I have come across in my research Nicolellis was searching for a methodology to deal with the volatility and variability of Brazilian market. He deduced that the most effective methodology for effectively trading the Brazilian market at that time was to control
Price inputs, and ignore variables like time, volume, and concentrate solely on price movement.

The Average True Range can be used to determine a specific bar range to assign to the range bar chart. In my personal trading I generally find myself trading 4, 6, and 8 period range bars. There are a wide number of reasons for implementing range bars in your e-mini trading. In no particular order, here are some commonalities intrinsic to range charts:

All bars on a range bar chart are the same height because the range is a constant.
The close of a bar is, by definition, always at the prior low or high of the preceding bar.
The elapsed time covered by each bar is variable, since time is irrelevant in the formation of range bars.
All gaps in the range bar formations are filled then with an artificial artifice called Phantom bars.

So why in the world would anybody want to use this strange charting configuration?

My experience with Range bars has shown me that this charting methodology is especially effective in trading and clarifying price movement. For example, on a time-based chart, periods of consolidation of appear as long, winding, and meandering periods that may stretch anywhere from 30 minutes to several hours. On the other hand, a range start will generally portray this tightly range bound pricing formation is one or two bars, depending upon the configuration you chose to portray as your base range bar range. In short, variables such as trend lines, trend channels, and the Bollinger bands are brought into sharper focus in seeing more coherent in structure.

It is important to realize that the data used to construct time based charts, a volume based charts (tick charts), and price based charts (range bars) is identical. The only difference in the charts is the formulation of how to display the data. Learning which methodology best serves your trading needs is highly personal nature, a matter of personal preference. In my experience, I have found a time and place to utilize all three charting techniques. It is my opinion that once you have developed a solid understanding of the manner in which the price action data is displayed on your chart will vary according to differing market conditions. Of course, it is important each Seder have a solid understanding of the strengths and weaknesses present in all three charting methodologies.

In summary, we have looked at price based charting techniques called range bars. We have spent a good amount of time contrasting price based trading bars against both time based and volume based charting techniques. Hopefully, this introductory article will pique your interest in learning more about all three charting techniques and when to best utilize each technique to your advantage. My final suggestion is to spend some time in simulation mode and develop specific methodologies to trade each of the charting techniques; further, it would be useful to look at a specific piece of price action and compare the charting results in all three charting modes we have discussed. Best of luck, and I hope that this short introduction will build awareness for range based charting techniques.