DEFINITION of Range
The range is the difference between a market’s highest and lowest price in a certain period. It is the indicator of volatility.
WHAT IT IS IN ESSENCE
Say a market has a wide range. It’s a sign that it was volatile over the period analyzed. So, it is one indicator of volatility.
And such can be important for measuring a trade’s potential risk.
And when a market is trading with a wide range, then the risk associated with trading it will tend to be higher.
It can also identify support and resistance levels. If a market is trading within a certain range for a long period, then the upper and lower limits are strong areas of support and resistance.
To calculate a market’s range, it is necessary to take the highest price point that it reached in the period you are analyzing. And you have to take away the lowest price point.
There are lots of factors that can affect this indicator. And what is wide for one market may be narrow for another. And even in equities, it can differ hugely from sector to sector.
HOW TO USE
Range trading is a strategy whereby a trader identifies overbought and oversold areas (or support and resistance areas) and buys at the oversold area (support) and sells at the overbought area (resistance).
The strategy works well in markets that are meandering up and down with no discernable long-term trend. This strategy is less effective in a trending market but can be used if one accounts for the market’s directional bias.
Usually, a range is created because the prices are getting bounced between a support and a resistance. First, these two levels are marked by trend lines.
Then, the trader can take a long trade, when the prices hit the support line and rally up. The trade is protected by a stop-loss sell order below the support trend line.
Likewise, a short trade can be taken when the prices hit the resistance line and pull back. The trade is protected by a stop-loss buy order above the resistance trend line.