Forex Trading System- Range Charts

OVERVIEW

Traditionally range has been defined as the difference between the highest high and thelowest low over a selected period of time (see Figure 7.1). In Figure 7.2, the verticalscale on the right is expressed in pips while the horizontal scale at the bottom is ex-pressed in minutes, and x is the day number inside the price array.

The study of range has always provided technical analysts with vital information on
the volatility and the trending properties of a time series.

RANGE BAR CHART

Graphically, there is nothing very exotic about a range bar chart. It is simply a verticalbar chart of the OHLC quotes at the top of the chart while range is represented as verti-cal columns at the bottom of the chart. (See Figure 7.2.)

The vertical scale in the lower right portion is expressed in terms of the quotecurrency of the underlying currency pair. Close examination of the vertical bars will reveal the timing of trending cycles and lateral congestion in the correspondingOHLC chart.

COMPOSITE RANGE CHARTS

In an analogous manner to the one described in Chapter 2 on activity, range sampledover a long time frame can be used to create time of day and day of week charts. Simplearithmetic averaging is employed to create interval range values.

TIME OF DAY RANGE CHART

The time of day charts shown in Figures 7.3 and 7.4 were designed by averaging 2-, 7-,and 15-minute range statistics for the time frame 1/1/2004 through 12/31/2004 for each weekday except Saturday. The vertical scale on the right is expressed in termsof USD pips.

DAY OF WEEK RANGE CHART

In a similar fashion, the time of day range charts can be concatenated to create a day ofweek range chart. The distinguishing time interval must be increased accordingly. (SeeFigure 7.5.)

AVERAGE INTERVAL RANGE CHART

Figure 7.6 uses one-minute high/low data from 1/1/2000 to 12/31/2003 in the EURUSDcurrency pair. We calculated the average range (high minus low) for each integer timeinterval from 1 minute to 60 minutes.

OBSERVATIONS

The chart in Figure 7.6 provides the trader with some interesting theoretical informa-tion. Note on the far left, the height of the first vertical bar is 5.14 pips tall. This meansthat for every one-minute interval in the horizontal scaling of the dealer’s trading plat-form there is a high statistical expectancy that the price movement will span 5.14 pips.

Within every half hour representation in the trading platform, the price movementshould cover a range of 18.5 pips. Every hour in the trading window, prices should span21.2 pips.