Wide-ranging days describe the price range of a stock on a particularly volatile day of trading. These days occur when the high and low prices of a stock are much further apart than they usually are. Some technical analysts identify these days by using the volatility ratio. Have you ever wondered what causes such remarkable price swings, and how you can leverage them?
Key Takeaways
- Wide-ranging days signal exceptionally large disparities between the high and low prices compared to an average day.
- Extreme wide-ranging days can help anticipate major trend reversals in the stock market.
- The Average True Range (ATR) provides a metric to compare the trading range across multiple days.
- The volatility ratio can be used as an automated method to identify wide-ranging days through technical indicators.
- Typically, wide-ranging days occur when the volatility ratio exceeds a reading of 2.0 over a 14-day period.
Decoding Wide-Ranging Days
Wide-ranging days have a true range significantly larger than the surrounding days. They usually predict a trend reversal. Extreme wide-ranging days herald major trend reversals, whereas less extreme ones may indicate minor reversals.
The ATR offers a way to compare trading ranges. It examines the difference between the current low and the close of the previous period. The absolute true range for a given period can be calculated from the high minus the low for that period, the high minus the close of the previous period, or the close of the previous period minus the low for the current period.
Typically, ATR is a 14-day Exponential Moving Average (EMA) of the true range. The EMA places greater importance on recent data points, often referred to as the exponentially weighted moving average.
For instance, after a sharp downtrend, a wide-ranging day with a strong close (near the day’s high) signals a potential upward reversal. Conversely, after a strong advance, a wide-ranging day with a weak close (near the day’s low) points towards a downward reversal.
Special Considerations
The volatility ratio can automate the process of pinpointing wide-ranging days through a technical indicator. Essentially, it simplifies identifying opportunities, enabling traders to screen stocks effectively instead of manually scrutinizing charts.
To calculate the volatility ratio, divide the true range for a day by the EMA of the true range over typically 14 days. Generally, wide-ranging days are noted when the volatility ratio surpasses a 2.0 reading over this period. Traders may employ volatility ratios in stock charts to spot potential reversal opportunities.
Wide-ranging days appear when the price range of a stock far exceeds the volatility seen on normal trading days. These days are often assessed using the ATR, and analysis is automated via the volatility ratio. While wide-ranging days usually predict trend reversals, confirmation ought to be sought through other technical indicators and chart patterns.
Investing carries risks, including potential principal losses. Utilize diverse indicators and formulate strategies tailored to individual financial circumstances.
Related Terms: volatility, trend reversal, technical analysis, average true range, exponential moving average, volatility ratio.
