I’d like to share an indicator I came up with that I found very useful over the years. It’s actually a very simple one but it proved itself against over and over again against much more complicated indicators that try to do the same thing. I surely wouldn’t want to miss it.
Here’s the formula: abs(open-close)/(high-low) * 100
Which gives us a value between 0 and 100 that measures the actual price change of a single price bar (absolute value of open-close) against the whole price bars range (high-low). Or in Candlestick charting language: measures the size of the candle body against the whole candle including the wicks.
Let’s look at a price chart to make this more clear:
The blue bars are showing the Daily BarStrength of Gold for each of the price bars/candles. Below you can find a 5 period EMA of that BarStrength. Notice that huge green candles that open nearby the low and close nearby the high show a high BarStrength score (50+) while candles that close near the open have a very low score.
So what you might wonder. Well here’s the interesting part: Notice that quite often you’ll get a strong price bar/candle after a weak one and the other way around. To highlight this I’ve plotted a horizontal line at 33.
The same is true on a larger scale looking at the moving average below. When it’s showing low values, meaning there’s been hardly any real price change in Gold for a couple of days, there’s a tendency for big moves to happen afterward.
I’ve found this to be true in many markets, Gold is just an example. While this works in principle on any timeframe, it’s most effective on higher timeframes like daily and weekly charts.
The BarStrength indicator doesn’t show you in which direction the market will move. But knowing when a market is more likely to make a big move than not can make a really huge difference in your trading results. This is why I like to use this as a filter for breakout strategies, like ORB (opening range breakout) strategies for example.
Happy Trading!
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Editors’ Picks
AUD/USD could extend the recovery to 0.6500 and above
The enhanced risk appetite and the weakening of the Greenback enabled AUD/USD to build on the promising start to the week and trade closer to the key barrier at 0.6500 the figure ahead of key inflation figures in Australia.
EUR/USD now refocuses on the 200-day SMA
EUR/USD extended its positive momentum and rose above the 1.0700 yardstick, driven by the intense PMI-led retracement in the US Dollar as well as a prevailing risk-friendly environment in the FX universe.
Gold struggles around $2,325 despite broad US Dollar’s weakness
Gold reversed its direction and rose to the $2,320 area, erasing a large portion of its daily losses in the process. The benchmark 10-year US Treasury bond yield stays in the red below 4.6% following the weak US PMI data and supports XAU/USD.
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Bitcoin (BTC) price strength continues to grow, three days after the fourth halving. Optimism continues to abound in the market as Bitcoiners envision a reclamation of previous cycle highs.
US versus the Eurozone: Inflation divergence causes monetary desynchronization
Historically there is a very close correlation between changes in US Treasury yields and German Bund yields. This is relevant at the current juncture, considering that the recent hawkish twist in the tone of the Federal Reserve might continue to push US long-term interest rates higher and put upward pressure on bond yields in the Eurozone.
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