FOREX RANGE BARS A TECHNICAL PAPER BY GORDON LANTZ VCI GROUP LTD

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FOREX RANGE BARS

A TECHNICAL PAPER

BY

GORDON LANTZ

VCI GROUP LTD

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Forex Range Bars. Why the buzz?

It's all about noise. Noise is the enemy.

As a technical Trader, you choose a time frame for your chart, then you apply your favorite indicator. Or perhaps you hunt through the list of indicators your charting package offers, trying them all. But your goal is simple... apply indicator(s) to your chart, adjust the settings to eliminate the false signals generated by noise, but hoping to use the tightest settings to get the earliest signals.

The problem is that the tighter you set your indicators, the more false signals you get. The looser you set your indicators, the later the entry and exit signals become, costing you profit in both entry and exit. Many highly mathematical "adaptive" indicators have been developed to overcome this obstacle, and by some great minds such as Mark Jurik

In 2006 I realized that using Range Bars can remove noise at the bar building level and then using standard indicators works very well to generate signals.

To see how important this noise removal is, I will suggest a demonstration later in this document. Before we do that, let me describe in detail how Range Bars are built.

Here is how Range Bars are made:

This is the technical stuff, and describes in detail how Range Bars should be made. It is how Forex By Design makes them and I'll explain how other charting programs make them inaccurately, why they do, and why it is important to make them properly.

Supposing our chosen range for this example is 5 pips and we are viewing EURUSD. RoB (range of bar) = 5

Let us start with a hypothetical string of ticks, to the one tenth of a pip resolution.

R (range of the bar) is the height of the bar, which is HH (Highest High) minus LL (Lowest Low). Open price = 1.40500 R = 0 pips

Next 1.40501, a rise of one tenth of a pip. R = .1 pip. Next tick 1.40510 R = 1 pip.

Next 1.40490 R = 2 pips Next 1.40485 R = 2.5 pip

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Copyright 2011, VCI Group Ltd, PO Box 1021, Riddle OR 97469 :: All Rights Reserved Page 3 At this point, if a candlestick chart, you will have a 1 pip wick from 1.40510, the HH to 1.40500 the Open, a candle body of 1 pip from 1.40500 the Open to 1.40490, the current price, and a wick of .5 pips from 1.40490 to 1.40485 the LL.

The bar building routine asks this question for every new tick to decide when to close the bar, and open the next one.

"Is the Range >= (these symbols are read "greater than or equal to") RoB, the set range for the bar?" If the answer is NO, then the next tick also belongs to this current bar. If Yes, then this is the tick that closes the bar. The next tick will be the Open of the new bar.

A real stream of prices is not presented by the market in even steps or increments. The difference in price from one tick to the next can be as low as .1 (one tenth) of a pip, at times it can be more than 1 pip, or even several pips.

There are market events where during the following seconds and minutes the market can move up and down by significant jumps. For example, Non Farm Payroll is known for this kind of erratic volatility. Back to our example bar we are building....

It had a wick on top and a wick on the bottom when we left it. Next tick 1.40465, a change of 2 pips. R now = 4.5 pips

Next tick 1.40455, a change of 1 pip. R = 5.5 pips, so this tick closes the bar. Now we have a completed bar:

Open: 1.40500 High: 1.40510 Low: 1.40455 Close: 1.40455

Next tick 1.40465 Open of new bar up 1 pip from close of last bar. Some important observations:

1. The Range measured as HH - LL does not always equal the Range of Bar chosen for the charts. In fact the HH - LL Range for the bar will be greater than or equal to the chosen Range. In reality, most of the time it will be a small amount over the chosen range since most charts are using one tenth of a pip precision.

2. If the Candlestick is Green (closing higher than it opened) the High and the Close will be the same. High = Close.

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Copyright 2011, VCI Group Ltd, PO Box 1021, Riddle OR 97469 :: All Rights Reserved Page 4 3. If the Candlestick is Red (closing lower than it opened) the Low and the Close will be the same. Low = Close.

4. There can only be one wick on a bar, and it can only be on the end of the candle body at the Open price.

It is not uncommon in real life for prices to be different by a pip or two, frequently more.

Now it is time to discuss how some software makes Range Bars differently. I call them "Synthetic".

Synthetic Bar Feature 1: Most software programs that offer Range Bars, or where some sort of indicator is available to make range bars, arbitrarily make all bar the exact same Range. HH -LL for every bar is exactly equal to the chosen Range.

Synthetic Bar Feature 2: Synthetic bars always have Open of the new bar exactly equal the Close of the last bar.

My main disappointment with Feature 1 of Synthetic Range Bars is that the close and open of the bars do not necessarily reflect a real price. Let me say that differently. If you look at one of these bars in our example chart, and the Open is 1.40500, and the HH is 1.40510, then the close of a synthetic bar will be 1.40460, exactly 5 pips below the HH.

This sounds logical, but wait: There never was a price of 1.40460! It went from 1.40465 to 1.40455. This does not represent reality. The bar should not seem to be closed where there was no price.

My main disappointment with Synthetic Bar Feature 2 is very similar. Neither the Close nor the Open represents a real price. Only real prices should be represented on your charts, otherwise what you think you see is simply not true.

These differences may sound subtle, but when the market heats up even slightly, these things become more exaggerated.

The real question is: "What do you want to be looking at when you are trading real money in the real market? Reality? or Imaginary Bars?

"My personal answer is simple.

I want reality.

This business requires the best tools of the highest

precision."

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Forex By Design provides Real bar building with its Forex Range Bars.

Here are some things you can see differently with Real Bars.

1. Because Open is made from a new and Real Price, you can see how the Open to Close relationship is tracking. If you are seeing gaps, you know prices were skipped in real time, and can evaluate momentum at a glance.

2. There is an indicator called ACH, or Average Candle Height. This shows the Candle Body Height (not including the wick) in a Histogram format, and plots a simple moving average over it. ACH and Real Range Bars can give the trader an excellent visual of both how "full" each candle is, as well as the trend of Candle Height as shown by the moving average.

Some traders who are accustomed to time based bars have a difficult time grasping the lack of visible Time relationships when they first begin using Range Bars.

The fact is, we trade Price, not Time, and Range Bar Charts show Price movement, without regard to time.

Time is still important. For instance, knowing how long (or brief) a period of time is spent per bar can be a very telling viewpoint of market analysis.

There is a Range Bar Chart indicator for that called TIB, or Time in Bar. TIB is displayed as a histogram hanging down from the top of the sub panel. Each histogram bar shows, in minutes and fractions of minutes, how long it took to build that bar. This is a momentum indicator. Short times to build bars = fast moving market.

The TIB indicator in Forex By Design overlays the Histogram bars with two moving averages, a faster and a slower one. These are configurable. When the faster average is on top (this is why the histogram bars hang from the top of the sub panel), the market is speeding up. When the faster average drops below the slower average, the market is slowing down.

This is very helpful in judging the energy of the market.

I believe that if you are serious about discovering the edge that Real Forex Range Bars can give you in your trading, that you must see it live in the market times you trade.

Sign up for Forex By Design. Once you have it installed and you are logged in, Open a chart of your favorite currency pair and time frame. Do that by going to File > New Chart and choose your Symbol and Series.

Now open up another chart of the same Symbol, and choose a Pip Range for it. 8 pips might be a good place to start.

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Copyright 2011, VCI Group Ltd, PO Box 1021, Riddle OR 97469 :: All Rights Reserved Page 6 Place some indicators on the charts. Now compare them side by side. Note that you can choose tighter settings for your indicators on Range Bar Charts. Adjust your indicator settings on both charts to give the best signals.

Now watch them in real time and decide for yourself if you get better entries

and exits with Real Forex Range Bars.

Because I genuinely want you to see for yourself, I have lowered the price for a limited time.

If you sign up for this lower price, it will never go up for you as long as you remain subscribed!

You will need to follow the link and sign up now.

http://forexbydesign.com

Thank you for your time, Gordon Lantz

VCI Group Ltd