Trading Strategies: Previous Day’s Trading Range
Sunday, December 20th, 2009Although 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.
As we discuss the previous day’s trading range and the stock investing opportunities that come from this, its important to point out that there is a difference between the previous day’s trading range and a stock gapping.
How does one calculate the previous day’s trading range? It is actually quite easy – you take the price of a stock at its highest point the previous day, and subtract that number from the lowest point of the stock for the previous day. Here is an example that will make it clearer. Let’s say stock X opened at $14 the previous day. During the day Stock X’s lowest point is $13.98 and its highest point is $16.2. If we subtract $16.2 from $13.98, we can see that Stock X’s previous day’s trading range was $2.22. Because this range is more than $2 it becomes a candidate stock when I am considering what to trade the next day.
Is there a reason a stock with a trading range of $2 or more is better? The answer is yes! Why? Because if a stock is trending up and has a range of $2 and above, there is a good chance the stock will a) continue trend up and b) because of its range, it gives you an opportunity to make some money.
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.
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

