What Is a Range?
Let me explain what a range means in trading—it's simply the difference between the highest and lowest prices of a security or index over a specific time period. You see it marked on charts as the high and low points on a candlestick or bar for a single trading session. This range defines how much the price fluctuated during that period, whether it's a day, a month, or a year.
Key Takeaways
- Range is the difference between the high and low prices in a given trading period.
- Range-bound trading is characterized by prices staying in a definable range over time.
- The amount of change in a range depicts the level of volatility that a particular security is experiencing.
- Range depends on the type of security.
Understanding a Trading Range
Technical analysts like you and me pay close attention to ranges because they help pinpoint entry and exit points for trades. A range for an individual trading period is the highest and lowest prices traded within that time. When you look at multiple periods, it's measured by the highest and lowest prices over a predetermined time frame. The relative difference between the high and the low defines the historical volatility of the prices, whether on an individual candlestick or over many of them.
Remember, the range depends on the type of security. For stocks, it depends on the sector in which it operates. Fixed-income instruments have a much tighter range than commodities and equities, which are more volatile in price. Even within fixed-income, a Treasury bond or government security typically has a smaller trading range than a junk bond or convertible security.
The amount of volatility can vary from one asset to another and from one security to another. Investors prefer lower volatility, so when prices become significantly more volatile, it indicates some kind of turmoil in the market. Many factors affect a security’s price and hence its range—macroeconomic factors like the economic cycle and interest rates have a significant bearing on the price of securities over lengthy periods. A recession can dramatically widen the price range for most equities as they plunge in price.
Examples of Trading Ranges
Take most technology stocks between 1998 and 2002—they had wide price ranges as they soared to lofty levels in the first half of that period, then slumped in the aftermath of the dotcom bust, many to single-digit prices. Similarly, the 2007-08 financial crisis considerably widened the trading range for equities due to the broad correction that saw most indices plunge more than 50% in price. Stock ranges have narrowed significantly since the Great Recession as volatility has reduced during a multi-year bull market.
Ranges and Volatility
Price volatility is equivalent to risk, so a security’s trading range is a good indicator of risk. If you're a conservative investor, you prefer securities with smaller price fluctuations compared to those susceptible to significant gyrations. You might choose to invest in more stable sectors like utilities, healthcare, and telecommunications rather than in more cyclical or high-beta sectors like financials, technology, and commodities. Generally, high-beta sectors have wider ranges than low-beta sectors.
Range Support and Resistance
A security's trading range can effectively highlight support and resistance levels. If the bottom of a stock's range has been around $10 on several occasions spanning many months or years, the $10 region is considered an area of strong support. Traders interpret it as a bearish signal if the stock breaks below that level, especially on heavy volume. Conversely, a breakout above a price that has marked the top of the range on numerous occasions is considered a breach of resistance and provides a bullish signal.
What Is a High-Beta Index?
A high-beta index is made up of volatile stocks. They're generally riskier, but they can be enticing for investors who are willing to gamble a little to achieve better returns.
What Is a Range-Bound Trading Strategy?
Range trading is what the name implies: You sell and buy within a range of prices—one at which a stock is currently trading and the other to which you believe it will rise. You trade within those price ranges, and the tactic can be used repeatedly over a set period until the current price of the stock is as high as you believe it will go, so it's time to get out of it.
What Is a Downside to Range Trading?
All trading strategies come with some component of risk, and risk increases when market trends are changing from contraction to expansion and back again. The success of range trading depends heavily on your ability to identify a market's trend during your times of trading.
The Bottom Line
The success of range trading can depend on how many participants are actively engaged in it at any point in time, even if their strategies are different. A trading range attempts to pinpoint the element of risk and volatility. This type of trading may not be suited for the faint of heart or less experienced traders. Consider getting your feet wet first by trading in more stable low-beta sectors, such as healthcare.
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