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February 12, 2010
Trading Range
Some stocks tend to cycle in value between a high and a low. When this cycle establishes itself the price range between the high and the low is a trading range. The top of the range is a resistance price or resistance zone. The bottom of the trading range is the support price or support zone. Many cyclical stocks have businesses very closed tied to the economy. Traders attempt to buy stocks at the bottom of the range and sell at the top. Likewise traders will short a stock at the top of the range and buy at the bottom. The nightmare of stock trading is that stock will break out of the range, up or down, just as he or she has made the trade. Good management of investment risk comes into play at this point to cut losses.

Trading between support zones is called range trading. In its purest form range trading assumes that a stock will always stay within its trading range. This is not always the case. Often a stock will be trending up but still display a cyclical pattern. A construction equipment maker, a steel maker, or an auto manufacturer will do well in a strong economy and will cycle down in a poor economy. If the company never grows it may well trade within the same trading range for years. However, a well managed company may well grow its assets and find that in successive cycles its support zone and its resistance zone move higher. Integral to trading within a range is
analyzing chart pattern reversals. Understanding candlestick charting techniques and candlestick pattern formations helps the day trader and investor buy stock or sell stock at the support or resistance zones to help maximize profit.

Traders often look for
stock price breakouts. News of a buyout or market news of a merger concerning a stable old company can drive a stock price higher or send shares of stock lower. Once a stock breaks out of its trading range it can trend up or down or simply settle into a new trading range. Fundamental analysis is important at such a time to help understand how the stock will perform next.

In range trading it is important to have a clear strategy for cases in which the market performs differently than expected. Only committing a portion of a trading account to
stock trades provides a valuable cushion in case of an unexpected stock price breakout. A sound investment strategy is to determine in advance when to exit unprofitable trades before they become disastrous trades. An important part of trading within a range is choosing what stocks to buy or trade in. Not all stocks cycle within a trading range. There are small startup companies that are good growth stocks. If successful these stocks will move upward in multiples. On the other hand many small startups eventually and abruptly fail. Understanding market fundamentals and closely following fundamentals of the company is essential. When such a stock matures it often becomes cyclical and trades in a range.

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