What’s a Trading Range?
Have you ever heard the term, trading range? You’ll hear it on the financial networks as well as read it in the investing websites. When the market isn’t going up or down consistently, people will start saying that the market is range bound or in a trading range.
A trading range is a component of technical analysis. It has no roots in the actual fundamentals of the underlying company so if you are the type of investor who doesn’t watch the charts, it is not recommended that you participate in this type of analysis.
Let me give you an example. Remember that the specific stock I’m speaking of isn’t a recommendation to buy. You may be reading this weeks, months, or years after I wrote it so please don’t run out and buy this stock because you read it here.
The stock we’re looking at in our study of trading range is Deere. (DE) You may know it as John Deere, the maker of machinery largely for agriculture. About two months ago, I noticed that Deere was running up to approximately $48 per share. Once it did, it sold off to $42 per share. This process had repeated itself 3 times before I noticed. I started buying at $42 and selling between $47 and $48. This has been a constant money maker for me.
What causes a trading range to develop? Many people don’t understand that when a stock moves, it is often the result of high volume traders like hedge funds and mutual funds. These managers trade millions of shares at a time and they have research analysts who set for them specific buy and sell levels. When these levels are hit, they react. It’s their way of removing emotion from their stock trading. This creates trading ranges. As more people notice, the more a trading range is established.
At some point, that range will be broken. A good or bad earnings report or some other fundamental piece of news may cause a stock to break it’s range. When this happens, you must exit your trade if it’s going down or set a higher stop if it goes down.
Not all stocks trade in a range. It’s important that you don’t look for a trading range when one doesn’t exist. If you are going to make money trading within the range, make sure that the company you picked is a quality company. No penny stock trading or you will get crushed. Good technical analysis should be confirmed with fundamental analysis.
If you see a clear cut range, trade in it if it’s a quality stock. You can make a lot of money and if you understand how to short a stock, short it at the top of the range and buy it at the bottom.
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i m new to this stock market field, i don’t know to predict anything yet, but i have been through many business tools for stocks that do help us to predict the range and about shares to invest on.
yeah i too noticed that before two months, Deere was running up to approximately $48 per share. but i haven’t sold my shares and so i missed the chance
yes many people don’t understand that when a stock moves, it is often the result of high volume traders like hedge funds and mutual funds. These managers trade millions of shares at a time and they have research analysts who set for them specific buy and sell levels.
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recently i have been through software name TRADE X which gives you info about the range and you may trade on it, but again i don’t think so it will be more than a human mind to bid.
March corn futures at the Chicago Board of Trade are presently trapped right in the middle of a 2.5-month-old trading range at higher levels on the daily bar chart. That trading range is bound by strong overhead technical resistance at the November high of $4.25 a bushel and by strong technical support at the November low of $3.72 1/2. The direction in which March corn “breaks out” of the aforementioned trading range on the daily bar chart will likely be the direction of the next significant price trend in the corn market.
By nature, trend trading generates far more losing trades than winning trades and requires rigorous risk control. The usual rule of thumb is that trend traders should never risk more than 1.5-2.5% of their capital on any given trade. On a 10,000-unit (10K) account trading 100K standard lots, that means stops as small as 15-25 pips behind the entry price. Clearly, in order to practice such a method, a trader must have confidence that the market traded will be highly liquid.
Do you ever consider the previous day’s trading range when making a decision on a position? You should!
I do..and have benefited numerous times. It does not matter which strategy I use – this is one of the last steps I do on my checklist.
It is a fairly simple task, but often provides many a successful trading opportunity
Here is what I do- I take the high for the previous day and subtract it from low for that day. If the range is more than $2, I definitely “short-list” this this stock for trading.
It can be a little complicated when you are range trading as in being tempted to buy or sell a stock when a company has issued its annual earnings report and the stock temporarily goes through a volatile period. One should keep in mind that the stock may NOT be trading in its true range! Look at other indicators and wait for the stock to settle down and then trade.
As a trader there are two things that you really need to look out for. Is the market in a trend or is it in a trading range? So, I really loved the article clearing all the trading range doubts.
Trend or range are two distinct price properties requiring almost diametrically opposed mindsets and money-management techniques. By assessing the price environment; doing so accurately greatly enhances a trader’s chance of success.
A trading range is the result of indecision or a sideways moving market where price volatility is often reduced and price moves within a general range during the period. This can lead to opportunities on a valid breakout from a trading range, leading to a new price trend that is bullish or bearish dependent on the direction of the breakout and resulting trend. So, its good to have an estimation of range through this.
It sounds like making sure you are on the winning end of the range is a little tricky. I do a little trading, but am not sure I have that much confidence in my skills quite yet. I do like using Google trends and other tools though to make trades with “fake” money, so I can get some more practice though.
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Trading trends are useful for a variety of price activity. A trading range creates a potential plot for additional study of support and resistance levels and allow for the recognition of a breakout from a channel or trading range area.
I like the idea of a trading range because it seems like a good indicator of the stock’s overall position in the marketplace. You have to still decide on your own about the big decisions, but this technique can give some clue into if the trade situation is normal or not.
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