What it means
The simplest trading range is for a single day: the high price minus the low price. Longer ranges work the same way over a week, a month or a year, and the 52-week range is one of the most quoted figures in market summaries.
A wide range shows a volatile security, and a narrow one shows a quiet one. The second meaning describes a pattern.
A share may bounce between a lower level, called support, where buyers tend to appear, and an upper level, called resistance, where sellers tend to appear. While the price stays between those levels the market is said to be range-bound or consolidating.
Traders use ranges in different ways. A range trader buys near support and sells near resistance, while a breakout trader waits for the price to move beyond the range with strong volume and then follows the new direction.
Each approach has risks, because false breakouts are common and a range can end suddenly. For businesses, the concept applies to more than shares.
A treasurer who sees a currency pair moving within a stable range for months may time purchases near the favourable end, but should plan for the day the range breaks. Commodity buyers use similar thinking for fuel, metals and crops.
The range also shapes risk measurement. Because it shows how far a price has moved in a period, it feeds into measures of volatility such as average true range, which accounts for gaps between sessions.
These measures help set stop-loss levels and position sizes. It is important to remember that a range describes the past.
A security that has been range-bound for a year can leave the range after a surprise announcement, so a range is a guide to behaviour and not a promise.
In practice
Real-world examples.
Example
A newspaper market report notes that a share's 52-week range is $31 to $47 and that it closed at $45. Readers can see at a glance that the price is near the top of its recent range. A cautious investor waits for a pullback before buying.
Example
A treasurer at an importer notices the euro-dollar rate has stayed between two levels for five months. She schedules purchases of euros whenever the rate nears the lower end of the range. She also sets an alert in case the rate breaks out.
Example
A commodity analyst at a bakery chain studies the wheat price, which has traded in a narrow range for a quarter. The analyst recommends buying forward contracts while volatility is low. The chain locks in costs before a possible breakout.
Formula
Calculation
Trading range = highest price - lowest price
Range as a percentage of the low = (highest price - lowest price) / lowest price x 100
Suppose a share has traded between a low of $50 and a high of $58 over the past three months. Trading range = 58 - 50 = $8. As a percentage of the low = 8 / 50 x 100 = 16%. A trader buying at $51 and selling at $57 would aim to capture 6 / 51 = 11.8% of the move, leaving a margin for error at each end.Case study
Seen in the real world.
Greywood Energy is a fictional utility used for this illustrative case. Its shares traded between $40 and $46 for most of a year, and a small investment club made several trades buying near $40 and selling near $46. Each cycle earned about 15% before costs.
When the company announced the sale of a major division, the shares jumped to $52 on heavy volume and stayed there. A club member who had kept waiting for a fall back to $40 missed the move. In this illustrative story the club added a rule that a close above the range on high volume triggers a review rather than a wait.
Watch out
Common mistakes.
- Assuming a range will hold forever. News and earnings can end a range without warning.
- Buying a breakout without checking volume. Weak volume often signals a false breakout that soon reverses.
- Ignoring costs. Trading within a narrow range can produce gains too small to cover commissions and spreads.
Questions
People also ask.
What is the difference between a trading range and volatility?
The range is a simple measure of how far a price moved, while volatility usually uses statistics such as standard deviation to describe variation.
What does 52-week range mean?
It is the lowest and highest price a security has traded at in the last year, quoted as a quick measure of where today's price sits.
How do I know a range is ending?
Common signs are a close beyond support or resistance on higher volume, but confirmation is never certain.
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