The Importance Of The Previous Day's Trading Range
One of the stock investing strategies I use is the previous day's trading range
. Although there are a few simple steps to follow, you may find a successful stock investing strategy! Let's define the concept. In basic terms it involved the lowest and highest price of a stock during the previous days trading. The more the trading range, the better chance to make money the next day!Before delving to deep into this, please understand that this is different than when a stock "gaps". Gapping is when the price of a stock opens a lot higher than the price it closed at the day before. Here is an example to illustrate this point. If a stock closes at $55 and opens at $59 the next day, then you can say that this stock gapped by $4. Obviously this is a great stock investing chance, but its not our discussion today.
Let's discuss how to determine the previous day's trading range. We begin by reviewing the stock's price performance the previous day. How high did the stock price go? How low did the price go? The difference between the highest price point and the lowest price point on the stock's previous days trading is the trading range. This example might help illustrate this point. The lowest price of the stock the previous day is $5. Its highest price was $5.8. Therefore the trading range for this stock is 80 cents. The general rule of thumb is the if the range is more than $2 the sock is worth considering for next day trading. Since this range is only 80 cents this stock may not be a potential stock for trading next day.
Reason? Well if a stock has a large range, especially to the positive, it means the stock has a better possibility of trading higher the next day. This is especially more the case when the stock has been going up over the last couple of days.
Another reason I use the previous day's trading range is to determine an entry position. Let's use the example where the previous day the stock opens at $34, and trades between $33.5 closing at $37 - for a previous day's trading range is $3.50. If this is the stock's average trading range, I will set my entry position at $35.25, and give myself a $1.75 profit or higher!
Calculating these numbers without using a tool like Excel may be hard. I have created an Excel spreadsheet with all the fields ready. You can get this spreadsheet here
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