Friday, October 10, 2014

Trading Problems Caused by Range-bound Price Patterns in Stocks

Trading Range Stock Market Condition
By Martha Stokes CMT

Trading Problems Caused by Range-bound Price Patterns in Stocks
We’re seeing many trading ranges developing in stock charts lately. What is a “trading range?”  It is a sideways pattern where a stock’s price moves up and down in a very wide range.  Usually any sideways pattern that is more than 7 to 10 points (dollars) wide constitutes a trading range.  Some ranges may be as wide as 50+ points for very pricey stocks. The typical range is 10-30 points.  
A trading range lopes up and down within a wide price range, moving sideways overall, due to the resistance at the highs of the range and the support at the lows of the range. We talked about Support in a recent stock review.
Resistance is like a ceiling for a stock price. It is a price level at which the market had been in agreement about the stock’s price for a time before a shift of sentiment occurred. As a stock moves up to that price level, depending on how long the price remained at that level, it will take a lot of sustained buying for the price to move up through it.
Often day traders, swing traders, and other short-term traders who are looking at micro-scale price analysis miss the fact that a stock is in a trading range because this particular sideways price pattern tends to last for a while.
A trading range can cause some nasty surprises in terms of whipsaws that appear to be random and totally unexpected when, in fact, the trading range resistance is the true culprit for that whipsaw.
Here is an example.
This is a daily chart of QR Energy (NYSE: QRE). It trucked on up and up until suddenly it reversed and fell steeply. Why?

Below is a weekly chart of the same stock. When you zoom out for a bigger picture of what is truly occurring with QRE, it is very apparent that this is a trading range bound stock, stuck in a wide sideways loping pattern. Within the wide trading range, there are intra-range resistance and support levels that catch the stock’s price movement and cause often unexpected turns within the range.

The chart above has far more price history and is telling you much more about what is going on with this stock.  As a swing or day trader, you are bound by the resistance and support levels within the range as well as the lows and highs of the range. This limits your point gain potential even on an intraday trade.
If you are unaware of these intra-levels of support and resistance, you could easily be in a trade, even intraday, that APPEARS to be low risk when it is truly very high risk and fraught with whipsaw potential.
Always study charts on many time frames so you can see the limitations of a stock’s price movement for better planning of trades. Then determine your strategy for trading that stock.  Do not go into a trade assuming that how YOU want to trade is the way the stock will behave.

Trade wisely,
Martha Stokes, CMT

Member of the Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock® Partner

Stock charts courtesy of MetaStock® with our thanks.

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