The IBS (Internal Bar Strength) indicator is very useful for creating trading systems of the type mean reversion. It has done very well in the last thirty years in indices and in the stock market.
But is it possible that it will continue to work in the future? The volatility that we are seeing makes it continue to perform very well. In this post I am going to explain how it works and we are going to see a strategy based on this indicator.
1. How does the IBS indicator work?
Some things you should know about this indicator:
- It ranges from zero to one.
- It measures the relative position of the closing price with respect to the high and low.
- A low value of the IBS indicator indicates buy and a high value sells (mean reversion).
2. The IBS calculation
The formula to calculate it is very simple:
IBS= (Close-Low)/(High-Low)
I know, better an example.
Yesterday, February 23, 2022, the SPY had a closing price of 421.95, a maximum price of 433.26, and a minimum of 421.35.
Ok, let’s do the math.
IBS= (421.95 – 421.35) / (433.26 – 421.35) = 0.6 / 11.91 = 0.05
A look at the behavior and what happened days later.
3. IBS applied in trading systems
Let’s see a strategy that is based on buying if the IBS is below 0.2 and selling when the IBS closes above 0.8. A very simple IBS strategy, the kind we like.
Let’s see the results applying it on the Nasdaq (it also works well on SPY):
Good, but could be improved. The results improve when we combine the IBS with the RSI to filter the entries:
To highlight the profit factor of 5.12 and that in the last twenty years has ended in positive.
4. Final conclusions
The IBS indicator still works quite well. Of course, it works better when the market is volatile (in conditions in which uncertainty).
I use it for swing trading systems combined with another indicator or filter.
Do not expect the indicator to work any asset. It works on stocks and ETFs because they group together different sectors/industries.
You can develop a profitable IBS strategy from this article, go for it!
You can find this strategy, along with the rest, at enlacity.com.