Trading system based on price ranges


Trading systems that use price ranges, are widely used by traders because they are simple, intuitive and psychologically natural. Statistics confirm their high efficiency in many markets. In the literature one can find a lot of approaches, based on different structures price ranges.

Kinds of price ranges

The purpose of this article - to systematize the methods used in the construction of trading systems based on price ranges (bands), and provide an overview of computer systems, which could help a trader in choosing the trading approach. The idea of all these approaches is the direct use of the properties of the strong lines of market charts. As you know if the price has met strong line (line basis), there are two possible scenarios:

1. This line will be broken, and then continue to move toward a breakthrough.

2. Price will not be able to break through the line of the reversal, and will move in the opposite direction. Trade from the strong lines (open position or while rolling back prices of the line, or if it breaks) - is the most natural way of market behavior.

Not surprisingly, many researchers have developed and analyzed the trading methods that turn this simple idea into a particular system. To do this, you first need to determine the exact meaning of the consolidation line to get the algorithm for automatic construction of such lines in the graphs. Numerous approaches, known in the literature differ in how they formalize the notion of a strong line, and so on which of the two scenarios are oriented rules for opening positions. Consider the first question of how to build a line consolidation. For the construction of the universal trading system must have two types of lines - support and resistance that will serve as benchmarks for opening positions.

Most bands consist of two lines - the bottom of the range (lower band) and the upper limit (upper band). According to the principles of construction of the lines used as boundaries, there are three main types of ranges:

- Smoothed and price limits at a given distance from it (this type ranges commonly called envelopes, envelopes);

- Smoothed price and limits on the variable distance from it, depending on the volatility of the market (bands, bands);

- The range in the form of moving extrema (canals, channels).

The easiest option - it is an envelope (envelope), which is a moving average (Moving Average, MA), and two copies of the MA, shifted up and down on it at a given distance, which is a parameter of the envelope (often it is given away as a percentage of the value MA). For example, the boundaries removed in 0.5% of 34-hour rolling average, the figure is well serve as lines of consolidation.

Adequate channel width allows you to open positions as on break these boundaries, and when you roll back from the border inside the range.

Variable Range volatility is determined primarily by the choice of the measure of volatility. Some of these ranges also contain options that width. Among the most famous - Bollinger bands (Bollinger Bands), which is a measure of the volatility of the standard deviation. Among the other possible approaches below consider Keltner channels (Celtner Channels) and STARC Bands (in the latter case, the Average True Range Average True Range, which is part of Systems trends, Directional Movement System).