MY STYLE - BLOG
Technical analysts have used various methods to handle ranging periods. However, these dont work most of the time as a ranging period still appears as a range.
Here are some different approaches to handling ranging. Range bars for example are a part solution where noisy movement within a given amplitude is suppressed. Here are some other options :
1 - Time based compression : In this approach, one would see ranging segments within an existing time frame by changing the time frame of that period from a current level to a higher period dynamically. What this means is that one would see a 5 minute chart having a user selectable period when that part of the chart is displayed with a higher time frame. What will happen is that the ranging period will drop or disappear in the overall context of the chart. I will show the conceptual implementation of the same in a few days.
2 - Amplitude based compression - beyond range bars - where variable amplitude thresholds are implemented based on the trend. So that trends stay sticky. What that means that if a chart shows a trend, the system will automatically start increasing the amplitude of the reversal threshold so that no mid trend whipsaws affect the trades. This is perhaps one of the best kept secrets of smart technical analysts, as it is not easy to implement such a scheme.
3 - Noise less charts - Point and figure, Renko and Kagi charts eliminate noise. Change the key threshold parameters in these charts to get the same impact of amplitude based compression. This is current part of TradeWithMe's cutting edge research, where initial experiments demonstrate very good potential. See samples of what is achieved. Same data - two different logic:
Much has been written by many writers and traders about ranging periods.
As a technical trader, I prefer to allow the trading system to manage such days so that trading remains non discretionary and enable automation. What are the ways to handle ranging ? These are some ideas:
1 - Stay away from the market - easiest and most prone to opportunity profit losses.
2 - Put a limit on stop loss loss limit for the day and exit trading for the day.
3 - Enable a well thought out strategy to play itself out. One example of that is to take trades initiated following a cross of a threshold. For example, if RSI or Stochastics does not cross 30/70 or 20/80, do not initiate a new trade.
Option 3 is the most promising and can be used by both discretionary and non discretionary traders for consistent trading. The choice of threshold logic is wide open, and can include what the trader prefers and uses normally.
A fundamental input, that may be used is to stay away from periods that include ranging before a market news event. Thats optional.
A good idea to manage volatile markets is to trade more frequently than even intraday strategies. This is something which I call "Fast Reversal" where trend direction is estimated at every price move and a trade taken. It can result in amazing accuracy as our own tests on BankNifty, which is very volatile, have shown. Accuracy levels are usually in excess of 80% for a well configured approach. As usual, no indicators - price is king!
Abnash Singh, Am a Trader helping small traders to realize their dreams.