Wide-raning days describe the price range of a stock on a particularly volatile day of trading. Wide ranging days occur when the high and low prices of a stock are much further apart than they are on a typical day. Some technical analysts identify these days by using the volatility ratio.
Wide ranging days have a true range that is larger than the surrounding days and usually predict a trend reversal. Extreme wide ranging days signal major trend reversals, while less extreme wide ranging days signal minor reversals.
In the above example, the SPDR S&P 500 ETF (SPY) experiences a wide ranging day that’s followed by a trend reversal higher. Traders may have confirmed the pattern by looking at other technical indicators or chart patterns, such as the relative strength index (RSI) or moving average convergence-divergence (MACD).
The average true range provides a way to compare the trading range between multiple days by looking at the difference between the close of the previous day and either the high or low of the current period depending on what’s greater.
The true range for a given period is the greater of:
The average true range is usually a 14-day exponential moving average of the true range, although different trades may use different periods. Traders should experiment with the range that works best for a given security or their trading style.
The volatility ratio can be used to identify wide ranging days using a technical indicator. In essence, this automates the process of finding wide ranging days and makes it possible for traders to easily screen for opportunities rather than simply looking at charts.
The volatility ratio is calculated by dividing the true range for a given day by the exponential moving average of the true range over a period (usually 14 days). In general, wide ranging days occur when the volatility ratio exceeds a reading of 2.0 over a 14-day period.
Traders may want to use setup a stock screener or use volatility ratios in their stock charts when looking for potential reversal opportunities.
Wide ranging days occur when the price range of a particular stock greatly exceeds the volatility of a normal trading day. Often times, these days are used measuring average true range and analysis is automated using the volatility ratio. Wide ranging days usually predict trend reversals, although traders should confirm reversals using other technical indicators and chart patterns.