This IBS (Internal Bar Strength) indicator gives the answer. However, that said, it is rather a pretty powerful simple tool no trader applies it to its fullest extent. The IBS works as measuring the closing position of a stock against its range of the day. As such, it could find trading opportunities based on buying and selling points in closure, focusing on short-term price movements and captures the markets during pullbacks. But trust me, it is very convenient when used in conjunction with other indicators like the RSI (Relative Strength Index).
So, here you find the step-by-step process of how to work on the IBS indicator and applying it in three backtested trading strategies. When you get familiar with how to use the IBS, you will come to know which markets are weak and which are strong, so you will enter and exit with confidence and accuracy.
What is the IBS Indicator?
Internal Bar Strength (IBS) Measures the strength or weakness of price action in a trading day. IBS Formula:
IBS = (Today’s Close – Today’s Low) / (Today’s High – Today’s Low)
Range 0 to 1. Low IBS occurs close near the low of the day indicates bearishness; i.e., the market is very weak.
High IBS near the day’s high-a high good close, means you are in a positive bullish market.
One of the most simple indicators but so powerful-as it permits you to take mean-reversion opportunities. Buy when the market is weak and sell when it strengthens
‘—-
Why do I use the IBS Indicator for trading?
The IBS indicator performs best as an intra-day-type measure of price and as a short-run indicator in order to capture mean reversion, the tendency of prices is to revert back to a more normal state after an extreme-value situation. Whereas a low IBS could be seen to suggest that the bulls are just messing around with the situation and that they would easily turn it around, a high IBS could suggest that the market would rapidly surrender some or all of the rally and turn on its heels. That would mean theoretically tracking those IBS signals and multiplying the profit from the trades once buys on weakness and sells on strength are achieved.
Three Proven IBS Trading Strategies
Let’s dive right in on three backtested IBS trading strategies that have done pretty well over time. Here are three strategies using IBS in different ways to leverage market inefficiencies for consistent profits.
Basic IBS Trading with QQQ ETF
Buy Rules:
If the IBS value is less than 0.1 that’s a sign of market weakness
Sell when the IBS value is more than 0.9 which is a sign of strength in the market
We applied this as a backtest in the QQQ ETF, which tracks the NASDAQ-100 Index, from 2000 to 2023. Here’s how that looks to us:
Check the link below
Initial Investment: $100,000
Portfolio value at 2023: $1.5 million
Annual Return: 12%, much better than the Buy and Hold.
Time in the Market: 38% of the time.
- Maximum Drawdown: 21%, much better than the 70% drawdown of Buy and Hold.
The IBS indicator displayed incredible short-term price moves short-term with the average profit for each trade coming out at a robust 0.79%, as well as very low time spent in the market because of minimal risk exposure.
—.
We used a two-day rolling average in this strategy of the IBS indicator, and that dials down that kind of specific short-term sensitivity to false signals. We used the ETF XLP that tracks Consumer Staples stocks-good ol’ Pepsi, Walmart, and Costco. To backtest .
Backtest Results:
Investment Started: $100,000
Portfolio Value: $413,000
Last Annual Return: 6.3%
Actual time in the market (33% of the time)
That also showed a max drawdown of 17%, much lower than in the traditional strategy.
The strategy fairly replicated mean reversion by Consumer Staples, but it would be able to net some profit with minimal loss while missing negligible lords of the market.
—
Strategy 3: Hybrid Model of IBS and RSI on SPY ETF
Trading Rules:
Buy, if the 3-day RSI is below 30. It is an oversold condition while IBS is below 0.2. The market is weak.
Sell, if IBS is above 0.9, and closes above the high of yesterday’s; that is confirmation of strength in price action.
We will use here in the strategy RSI, which shows an overbought/oversold situation, combined with **IBS, showing how strong is price action during the day, thus generating more accurate buy and sell signals.
Backtest Results:
We used this hybrid strategy on the SPY ETF, tracking S&P 500, from 1993 to 2023.
Initial Balance: $100,000
At Last Observation of 2023: $1.5 million
Annual Return: 9.6%
Time in the Market: 18% of the time.
Max Drawdown: 23%. Much lower as compared to the Buy and Hold whose 55% drawdown is scary especially during market crashes like in 2008.
Also, it was applied in double showing even better results than the market during turbulent periods, for example, like the financial crisis of 2008, for instance where the strategy returned 47%, meaning that IBS is also very effective times of higher volatility.
Conclusion when using IBS in Trading
Catch medium-run price movements, and especially identify market reversals – this is one of the great strengths of the IBS tool.
Strong entry and exit signals, mainly in combination with other signals, such as the RSI.
Consistent and profit-generating results with smaller drawdowns, mainly if comparing to Buy and Hold.
Probability of more trades on strategies of buys based on weaknesses or low IBS values and selling at high values where the markets will most probably revert.
The IBS indicator is pretty strong for any trader who would be able to capitalize on short-term price movement in the market and, at the end, win with the retrace and the rally. You will, therefore, apply in your trading usage of the IBS indicator to make even much better decisions, mitigate risks even better, and win even bigger profits.
These three backtested strategies display performance in really a wide range of sectors and conditions of the market. Putting the IBS indicator into practice as such is quite enough to improve your trading performance, for with such a very useful tool you will be able to do so.
Want to start applying the IBS – Internal Bar Strength strategy? Try to apply these principles in trading and begin to realize any gains for the movements of the market!
In this post, we will talk about the IBS trading strategy, how it can be interpreted into real life, and to crown it all, the past performance. Integrated keyword is used to form organic SEO value. I do not come up with a traditional type of introduction, but instead actually utilize the problem-platform-solution (PPS) framework. That will set the framework for the reader on why IBS is of importance and how it may be a game-changer for them in terms of a trading outcome.