Meta-Trader - Range Bands - Part 1

Welcome back, Meta-Traders.

In this post, we lift the curtain on the Range Bands indicator.  I consider this to be the ultimate Trend Following indicator. Many a product and career has been launched with less than this much information. And I'm giving to you here at no cost or obligation - just because I can.

Before I give you the algorithm, let's review the qualities of a good trend-following indicator:

• Indicator should work in multiple time frames from Intra-day through Daily Weekly and Monthly
• Indicator should work for multiple tradables including Stocks, Futures, Forex
• Indicator should give unambiguous signals regarding long or short including price level at which the trend direction changes
• Indicator should never miss a big move
• Indicator should be purely price-based
• Indicator should not get overly whip-sawed between long and short signals

This last one is pretty important because you could make the case that a simple moving average crossover meets all of the above criteria.  But in a flat or direction-less market, moving average crossovers whipsaw your account into poverty, and we certainly don't want that.

Okay, enough rhetoric.  Here is the algorithm:

• Find the Highest High and the Lowest Low over the look back period.  14 bars is my favorite look-back period
• Find the Midpoint as the Lowest Low plus half the different between the Highest High and the Lowest Low
• Find the Average True Range (ATR) over the lookback period
• Find the Offset as 1.05 times the Average True Range
• The Upper range band is the Midpoint plus the Offset
• The Lower range band is the Midpoint minus the Offset

Now for any given price bar we have the closing price, the Upper Range band and the Lower Range band.

• If Price is below the Upper Band, we are in an a Uptrend 
• If Price is below the Lower Band, we are in a Downtrend
• Otherwise, the price is Neutral and the most recent Uptrend or Downtrend signal is still in effect

The top graphic above is created with TradeStation which easily allows bars to be easily painted blue (for Uptrend) or red (for Downtrend) or green for between the upper and lower Bands.  I coded the indicator for Meta-Trader (left) but have not yet accomplished the bar coloration. I uploaded the Range Bands MQL4 indicator to my yahoo group at: Fx-Mon group.

Next steps are to implement as a trading system inside inside Meta-Trader and see if it has any merit.  I expect I know what the answer is going to be, but its worth the exercise.  It will also be interesting to back-test in Meta-Trader versus TradeStation to see if there are any significant differences in the results.

Range bands are similar to Bolliger Bands except Bollinger Bands use a Moving Average center line and Standard Deviations from the mean for the bands.  They are similar to Keltner Channels except Keltner uses  a moving average center line and multiple of the ATR set as a parameter.

One weakness of the range bands as a trading system is that the distance between the high and low signal bars is 2.1 times the ATR.  The system allows that much for slippage before changing directions.  Active trading should instead demand a much smaller possible loss for potential gain, say risk $1 for a potential gain of $3.

Come back later for part 2 and have a great week.