What is a Range?
Range refers to the difference between the low and high prices for a security or index over a specific time period. Range defines the difference between the highest and lowest prices traded for a defined period, such as a day, month, or year. The range is marked on charts, for a single trading period, as the high and low points on a candlestick or bar.
Technical analysts closely follow ranges since they are useful in pinpointing entry and exit points for trades. Investors and traders may also refer to a range of several trading periods, as a price range or trading range. Securities that trade within a definable range may be influenced by many market participants attempting to exercise range-bound trading strategies.
Understanding a trading Range
A range for an individual trading period is the highest and lowest prices traded within that trading period. For multiple periods, the trading range is measured by the highest and lowest prices over predetermined time frame. The relative difference between the high and the low, whether on an individual candlestick or over many of them, defines the historical volatility of the prices. The amount of volatility can vary from one asset to another, and from one security to another. Investors prefer lower volatility, so prices becoming significantly more volatile are said to indicate turmoil of some kind in the market.
The range depends on the type of security; and for a stock, the sector in which it operates. For example, the range for fixed-income instruments is much tighter than that for commodities and equities, which are more volatile in price. Even for fixed-income instruments, a Treasury bond or government security typically has a smaller trading range than a junk bond or convertible security.
Many factors affect a security’s price, and hence its range. Macroeconomic factors such as the economic cycle and interest rates have a significant bearing on the price of securities over lengthy time periods. A recession, for instance, can dramatically widen the price range for most equities as they plunge in price. For example, most technology stocks had wide price ranges between 1998 to 2002, as they soared to lofty levels in the first half of that period and then slumped—many to single-digit prices—in the aftermath of the dotcom bust. Similarly, the 2007-08 financial crisis considerably widened the trading range for equities due to the broad correction that saw most indices plunge over 50% in price. Stock ranges have narrowed significantly since the Great Recession as volatility has reduced during a nine-year bull market.
- 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, compared to the overall price, depicts the level of volatility that a particular security is experiencing.
Ranges and Volatility
Since price volatility is equivalent to risk, a security’s trading range is a good indicator of risk. A conservative investor prefers securities with smaller price fluctuations compared to securities that are susceptible to significant gyrations. Such an investor may prefer 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 speaking, high-beta sectors may 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 a number of occasions spanning many months or years, then the $10 region would be considered an area of strong support. If the stock breaks below that level (especially on heavy volume), traders interpret it as a bearish signal. Conversely, a breakout above a price that has marked the top of the range on numerous occasions is considered as a breach of resistance and provides a bullish signal.