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 price spread for a defined period, such as a day, month or year, and indicates the security’s price volatility. The more volatile the security or index, the wider the range. The range expands over greater time periods; a security’s daily range is typically smaller than its 52-week range, which in turn is tighter than its five-year or 10-year range. Technical analysts closely follow ranges since they are useful in pinpointing entry and exit points for trades. Investors and traders may refer to a range, as a price range or trading range.

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.

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.

A security's 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. (To learn more, see: How do I Effectively Create a Range-Bound Trading Strategy?)