Within a single trading day, for example, a security will often move up and down a bit, and the difference between the high and low points is the trading range. You could also look at a stock’s high compared to its low during a longer trading range, such as a year. Some investors believe a trading range can contain insights into what will happen to a security going forward, but these beliefs can vary significantly based on an investor’s own interpretation and the circumstances around the investment. For example, if a stock is trading near its 52-week high, some investors might view that as a sign that the stock is nearing its peak and will soon fall. Yet others might view this data point as an indicator that the stock will soon soar to new heights.
How Does a Trading Range Work?
A trading range is determined by the high and low prices of a security, which fluctuate based on what investors are willing to buy and sell for. After a company announces a strong earnings report, for example, investors might rush to buy that company’s stock, causing the stock to reach a high for, say, the month. Yet in the following days, after the earnings excitement dies down, demand might not be strong enough to support this high price, so the stock starts to trade a bit lower. For the next few weeks, the stock might trade within a range of this high point and its low point from the previous month. Some investors try to take advantage of these fluctuations by engaging in what’s known as “range trading.” If you think that the stock will stay within a certain range over a given period, such as fluctuating between a low of $10 per share and a high of $20 per share, you might try to buy near the low and sell near the high. The risk, however, is that the security might not stay within this range. You might purchase a stock at $11 per share when it’s near its monthly trading range low of $10, thinking it will bounce back toward its high. However, the stock’s price could fall to $5 per share over the following month. On the flip side, it’s possible for a stock to exceed its trading range, too. You might have sold that stock at $20 per share, thinking that was the peak. However, the stock might continue climbing to $40 per share.
What It Means to the Individual Investor
This investment strategy based on the trading range uses what’s known as technical analysis. Rather than relying on the fundamentals of a company (such as profit growth and executive leadership) to make stock picks, an investor using technical analysis looks for investment chart indicators, like how the stock price has ebbed and flowed over the past six months. A trading range might be used by some professional investors or day traders to try to time the market, and they might have a technical analysis process they believe in. However, for the average investor, timing the market and using technical analysis tends to not work very well. So, investing based on trading range might not be right for every investor. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
