Today I decided to try to see if the position that a price closes within a bars range can be used at all to try to predict the most probable direction of the next candle. Inner Bar Strength or IBS is used by a lot of traders but how much use is it?
To try to quantify this I wrote an indicator that checks what a candles IBS is and then checks the next candle to see if it was an up candle. The tests are divided into 10 buckets 0 to 10% IBS, 10 to 20% IBS etc. The results were returned as a win rate for each bucket.
The indicator output:
To try to make more sense of the results I tested on two of the biggest markets – the SP500 and EUR/USD. I tested on monthly, weekly, daily, 4 hour, 1 hour and 15 minute charts and then put the results in excel. Green highlights any win rate that is above the win rate if every bar were tested without considering IBS – and red any win rate below this all time average. The column labelled ‘Green’ totals up how many of that particular results buckets across all time frames was above the average and the ‘All’ column is an average of the results across all time frames.
The tests were done on different length look back periods due to the limited look back available in faster time frames.
I’m not sure how conclusive the results are but it can be seen that the slower the time frame the less reliable IBS is as a predictor of what will happen on the next bar. It can also be seen that IBS is more likely to predict a reversal than a continuation. If IBS is low then the next bar is more likely to be an up bar and if IBS is high then the next bar is more likely to be a down bar but as price is always reverting to a mean this is not surprising. The ‘Green’ column and average across all timeframes column seem to hint that perhaps using IBS across multiple time frames to select an entry point in an MTF mean reversal strategy might be worth looking in to but overall I was left with a feeling that inner bar strength is not a particularly good tool for deciding on the most probable future price direction but it may offer a very slight edge in a mean reversal long only strategy on an index.
Your thoughts on the results and inner bar strength would be most welcome.
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