A range bar chart is a type of chart used in forex trading that represents price action using bars that have a fixed price range. Unlike traditional time-based charts, where each bar represents a fixed period of time (such as one hour or one day), range bar charts are based on the price range of the asset being traded.
Range bar charts were developed by Vicente M. Nicolellis Jr. to provide a more accurate representation of price action in volatile markets. Traditional time-based charts can be misleading during volatile periods because they may include periods of low volatility, which can distort the overall picture of price action. Range bar charts, on the other hand, only include bars that meet the predetermined price range, which means that they are more accurate in representing price action during periods of high volatility.
Range bar charts are particularly useful for traders who use technical analysis because they provide a clearer view of support and resistance levels, trends, and patterns. They also make it easier to identify key price levels, which can help traders make more informed decisions about when to enter or exit trades.
How Range Bar Charts Work
Range bar charts are based on a predetermined price range, which is set by the trader. For example, if a trader sets the price range to 10 pips, each bar on the chart will represent a price range of 10 pips. If the price moves 20 pips in one direction, two bars will be formed on the chart, each representing a range of 10 pips.
Range bar charts are not based on time, which means that the time it takes to form a bar can vary depending on the volatility of the market. During periods of high volatility, bars will form more quickly, while during periods of low volatility, bars will form more slowly.
Advantages of Range Bar Charts
One of the main advantages of range bar charts is that they provide a more accurate representation of price action, particularly during periods of high volatility. Traditional time-based charts can be misleading during these periods because they may include periods of low volatility, which can distort the overall picture of price action.
Range bar charts also make it easier to identify key price levels, such as support and resistance levels, trends, and patterns. This can help traders make more informed decisions about when to enter or exit trades.
Another advantage of range bar charts is that they can be customized to suit the preferences of individual traders. Traders can choose the price range for each bar, which means that they can create charts that are tailored to their specific trading strategies.
Disadvantages of Range Bar Charts
One disadvantage of range bar charts is that they can be more difficult to read than traditional time-based charts, particularly for traders who are not familiar with them. Because they are based on price ranges rather than time, the spacing between bars can vary, which can make it more difficult to identify trends and patterns.
Another disadvantage of range bar charts is that they can be prone to false signals, particularly during periods of low volatility. Because bars are only formed when the price moves a certain amount, there may be periods when no bars are formed, even if the price is moving in a particular direction. This can result in false signals that can lead to losses for traders.
Conclusion
Range bar charts are a useful tool for forex traders who rely on technical analysis to make trading decisions. They provide a more accurate representation of price action during volatile periods and make it easier to identify key price levels, trends, and patterns. However, they can be more difficult to read than traditional time-based charts and can be prone to false signals during periods of low volatility. Overall, range bar charts are a valuable addition to any trader’s toolkit, but traders should be aware of their limitations and use them in conjunction with other technical analysis tools.
