Calculating the optimal value setting for range bars
How does one go about calculating the best range bar value setting to use for a market? I understand that it depends on the type of trading involved, but I'm interested to find out the factors involved in the calculation and the logic behind it.
Price action is fractal in nature, so generally speaking, the larger the scale, either in time or range size, the larger the targets and stops you will need to use to trade sucessfully. Also, using a given method, you will typically have fewer signals during the same period of time and the quality of the signals will usually be better on larger scales. Because the price moves "slower" as the scale increases, you typically have more time to consider your trades before you enter them. For example, swing traders will often complete a checklist before entering a trade while most day traders do not. Finally, the ratio of the spread and commissions to the average trade also decreases as scale increases. Consequently, it is typically easier to trade on larger scales than smaller scales. Most people swing trade with 60 to 1440 minute charts and most people day trade with 1 to 15 minute charts and/or 2 to 24 range charts, depending. Swing traders will often zoom in to smaller scales to time their entries and most day traders will zoom out to understand the bigger picture context of their trades.
As far as scale goes, most people just use what feels comfortable to them. If you aren't sure what to start with you can look at the ATR for your instrument on a given time scale during the periods you trade and the use the approximate figure as the range setting. For example, if the 20 period ATR for ES on a 5 minute chart is around 8 ticks during the period you trade, then you could use an 8 tick range chart. If you are new, I wouldn't recommend using anything less than a 5 minute or equivalent scale. I changed my range size when things slowed down over the summer and then changed it back when things started to pick up in the winter, but some people leave it the same all the time. Hope that helps.
The following 8 users say Thank You to vegasfoster for this post: