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A trading range is an area where prices for a period of bars remain in a fairly confined price range. Technical analysts believe that this is a period where supply and demand for a financial instrument are at equilibrium. If there is a large price breakout of the trading range, it shows that suddenly the supply or demand for the instrument has increased. This could signal the beginning of a large price movement.

Investors have been eyeing or hand drawing trading ranges on charts for years. This has lead to varying opinions among investors about the definition of trading ranges and about what constitutes a valid breakout from a trading range. This subjectivity has also made it virtually impossible to historically test trading ranges.

Investigator uses a precise mathematical definition for trading ranges, as well as precise mathematical definitions for breakouts from trading ranges. The definitions for the breakouts are described in the testing dialog box section for trading ranges. The definition for a trading range is described below.

There are three values that Investigator uses for the definition of trading ranges: Total Bars, Range Bars, and % Variation. A trading range occurs anytime prices are confined to a range that is within (% Variation) times the average range of the last (Total Bars) for (Range Bars) or more. Specifically, Investigator will:

• Find the average bar range for the last Total Bars number of bars.
• Multiply the average bar range by the % Variation value.
• Find the average midpoint of the last Range bars number of bars.
• Calculate the high and low testing range values by adding and subtracting half the figure obtained in step 2 to the figure obtained in stop 3.
• See if the highs and lows for the last Range bars number of bars are between the testing range high and low figures. If all the highs and lows are within the testing range, we have a trading range.

Calculation Example

Testing Dialog Box

Reference: None.