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.