One method I love in trading stocks (and I use something similar in forex as well – it can really be used in any market) is keeping track of the daily range of a stock, as well as the distance it normally closes away from the high or low. This gives a lot of info. These figures can be calculated using EXCEL by simply tracking open, high, low and close prices. Manipulating this data in EXCEL can provide a wealth of information which can help a trader pinpoint better entries, stops and profit targets.
Since we are watching daily averages, this information is commonly used for day trading strategies, and can used on its own or more effectively with other indicators,methods or strategies. With this strategy I will generally watch volatile stocks (for the currency markets, the eur/usd or gbp/usd at the start of the Euro or US sessions for example, but allow about 30 minutes instead of 15) to make a high or low in the first 15 mins of the day or so. Often a high or low made early in the day is very important (when using this strategy), and either the high or low made in that initial 15 minutes gives us a base line for the rest of the day. We then watch to see which level (either the high or low made in the first 15 minutes or so) is going to be a high or low for the rest of the day. We do this by watching for a lower high or higher low in the stock as trading progresses. The methods used to confirm this bottom or top are plentiful, but often simply watching a stock plummet in the first 15 minutes, then rebound, then fall again – but not as far is it fell before, and then bounce up again is confirmation that the low in the first 15 minutes is probably the low for the day.
So now we now have assumption that a low (or high) is in place for the day. We are also armed with our statistics which tell us what the average daily range (percentage or price movement of the stock) is. Once we have established that a low (or high) is likely in place, We can take positions with profit targets at a price which would be around the area of the daily average range (if indeed we did have the low in place already).
Here is a super simplified example. A ten dollar stock has a 10% daily range. Each day this is converted into dollars based on the opening price, so today the price range is expected to be $1.00 (10% of the open price) if the stock opens at $10. In the morning the stock drops to $9.75. Bounces up, falls back to $9.90 and then moves higher again. We assume the low is in place. We buy, and place an exit around the extreme of the average daily move. The average is move is $1 (10% of $10). We have already moved $0.25 (the open at $10 down to $9.75) so our target is around $10.75 (since our low is already in place we must assume all action will now be above the low and on the upside,) and then adjust it to fit other support/resistance or other profit targets. So, to sum up, in this case our profit target is our assumed low plus the daily average range; $9.75 + $1.00 in this case = $10.75
I also the think the open is very important. For this reason, I will open use a move back through the open price as my entry. In the example above the stock made a low at $9.75, then bounced, and then fell back again to $9.90. Once the stock move back up through the open price (in this case $10) I will enter a buy (or long) position. A stop can be placed below the low (whichever low you prefer, but likely the lowest low of the day) and then I set my profit target.
There is a second part to the trade though. If prices move to around our profit target we exit the trade. But then what? That is why we track how far the stock typically closes from its high or low. This way we get another trade.
Lets say the stock closes within 30% of its high (or lows) on average. With a daily range of $1, if the stock just hit its high and we are heading into closing time, we can short and place our exit .30 from the high. To get short (or long if we are dealing with a bounce off the low of the day heading into the close) we watch for reversal signals once we are in or beyond the average daily range territory.
This style of trading strategy should give some ideas about improving your own methods, or you can implement this method and refine it to your own preferences. You can also add standard deviation studies for additional insights.
Cory Mitchell, CMT
