A changing trading range can be a great early indicator for future market movements. The market, however, can sometimes distort the simple relation between trading range and price.
To make the right trading decision, you therefore have to know a few more factors to avoid losing a lot of money with bad decisions. This article will explain everything you need to know.
Volume and the Trading Range
A widening trading range generally indicates a strengthening trend, while a narrowing trading range indicates a weakening trading range. There is, however, another factor you should not leave unaccounted: The volume.
When determining the meaning of a changing trading range, the volume is essential to drawing the right conclusions. In general, a rising volume accompanies a widening trading range. This makes great sense, since for the range to become wider, more traders need to invest in the asset. If more traders get interested in the asset, they usually expect significant price movements for the future. This means, the existing trend is likely to strengthen.
A shrinking volume, on the other hand, usually accompanies a narrowing price range. Because traders do not expect significant price movements for this asset in the future, they lose interest and search better investment opportunities elsewhere. Before you invest, make sure the price movement is obeying this relationship of trading range and volume. If it does not, it might simply be a coincidental change of trading range upon which you should not invest.
The effect of the open and close
Another important factor when interpreting the trading range is the relation of the closing price to the total trading range of the bar.
There are four possibilities:
1: Expanding trading range & closing price near the high / low of the period
An expanding trading range that takes the closing price along on the ride is a strong sign of a strengthening movement. The ideal form of this candlestick would be a Big Candle. While the widening range is a sign of strength by itself, the closing price near the extreme is another sign for a strong movement. Combined, these two signs are a sure indication the current movement has a lot of power left.
2: Expanding trading range & closing price far from the high / low of the period
An expanding trading range that barely influences the closing price’s position in relation to the opening price can be a first sign of impending problems.
While there are still some traders left that are willing to invest in the continuation of the movement, some traders have lost faith and get rid of their current positions. This situation could lead to a Doji candlestick, which is a sign of indecision in the market. After the Doji, the market could continue in either way, but you should be aware that the future of the current movement is far from secure and that a change in price direction might be impending.
3: Narrowing trading range & closing price near the high / low of the period
While a narrowing trading range is a sign of a weakening movement, the closing price can offset some of this indication if it moves further from the opening price than in the previous periods. While this situation is relatively rare, it occurs often enough when the closes in previous periods were relatively close to their respective opening prices. In this situation you should be careful to expect an impending change in price direction.
Consult other indicators and check for candlestick formations, support and resistance levels, and all other factors that could be influencing the price in the current situation.
4: Narrowing trading range & closing price far from the high / low of the period
This is the most significant indication of a weakening trend, combining the negative indication of a narrowing range and the close moving further from the period’s extremes.
Traders are reluctant to invest in the continuation of the movement AND are trying to close their existing investments. As a binary options trader, you should stop investing in the movement immediately and wait for the situation to resolve itself. Be prepared to recognize any signs of an impending reversal, as they can provide you with a great investment opportunity.
All of these possible situations gain importance when they are combined with a high trading volume. As with any price formation, low volume always leaves room for coincidence.