| Previous Day's Trading Range Trading Strategy |
 |
 |
 |
| Written by James Wanjagi |
| Sunday, 25 July 2010 15:22 |
|
Although not often discussed, the previous day's stock trading range is an excellent way to determine how you will invest in stocks the next day. Simply put the previous day's stock trading range is the difference between the highest price and lowest price of a stock on the previous day. The larger this difference is, the more appealing a stock is to invest into the next day and hopefully make some gains.
Although not often discussed, the previous day's stock trading range is an excellent way to determine how you will invest in stocks the next day. Simply put the previous day's stock trading range is the difference between the highest price and lowest price of a stock on the previous day. The larger this difference is, the more appealing a stock is to invest into the next day and hopefully make some gains. Note: This is different from a "gap" at the open. A gap happens when the stock price opens significantly higher (or less) than the close price the previous day. In other words, if a stock closed at $12 yesterday and opens at $15 today, the stock is said to have "gapped" by up by $3. While stocks that "gap" up present a good trading opportunity, this is different from the previous day's trading range. The previous day's trading range is derived by taking the high stock price for the previous day, and subtracting that from the low stock price for the previous day. For example if the previous day the stock opens at $34, and trades between $33.5 closing at $37, the previous day's trading range is $3.50. If the range is more than $2, I definitely "short-list" this stock for consideration when planning my next day trades. Here is the basic rationale - stocks that have a larger trading range present a better opportunity for larger moves to benefit from, than stocks that fluctuate by a few cents each day. It is important that the stock is trending upwards if you plan on going long on the stock. Also there should be an increase in the previous day's trading range for the last 3 days or so. In addition, you can use this information to determine at what price you will purchase a stock. Remember when we discussed Stock X and we said its average trading range was $2.22. Well, if Stock X closed at 14.5 the previous day and I was to buy this stock at say $14.8, I know I would make at least $1.4 if stock X hit the same highest point of $16.2 it did yesterday. So - there you have it! It is worth noting in closing that using Excel to calculate the range and entry positions is worthwhile. Here is the spreadsheet I use. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. James W. is a well-known stock investing writer.. He has written a must read article - previous day trading range |