TRADE RANGE – What it is and how it’s calculated

The previous two articles help to understand historical stock price volatility and how volatility is used to calculate the expected Daily Move. The Daily Move is expressed in dollars and as a percent of a stock’s latest price. The Daily Move is the basis for determining the Trade Range used in the Tactical Trading System.

The Trade Range is the dollar amount a stock has to move, up or down, to trigger an action. An action can be a buy, sell or No Action. In TTS the term buy is often referred to as a loss, and a sell as a win. A No Action is a win whether long or short.

When setting up a stock to trade in the system you will decide what the dollar amount of the Trade Range is to be. You can choose any number you like, but the more scientific and sound way is to use Daily Move as your Trade Range starting point.

When viewing the Daily Move it is always accompanied by it’s percent of stock price (last or close). This percent is very important to pay attention to. If it is too small the system will produce significant activity and the profit per cycle will be lower. If the Daily Move percent is too large there will be fewer actions over time and the system will stall. On the other hand a large Daily Move percent will create a large profit.

You will find the Daily Move tends to settle at between 2.5% and 5% of stock price. This range has been historically proven as the sweet spot for the Trade Range.

The Trade Range is often the same as the Daily Move. We can take it a step further and customize the Trade Range to better reflect current price movement. We do that by viewing the Five Lines chart and adjusting the Trade Range Multiple.

The Five Lines chart is available on several pages. It is a 40 period candle chart overlayed by five linear regression lines spaced apart by the daily move and acts like a volatility envelope. The spacing between the lines can be adjusted to range from the lowest low to the highest high of the chart, or anywhere in between. This will give the “best fit” Trade Range for the most recent price data. The selected adjustment is known as the Trade Range Multiple.

The Trade Range can be adjusted anytime during a cycle. Increasing the Trade Range may maje sense if the stock’s volatility has increased significantly during the cycle progression. Reducing the Trade Range mid-cycle is not recommended as doing so could result in selling some of the existing shares at a loss. If you are stringing cycles you can chose to have the Trade Range auto-adjust at the end of each cycle.

The Trade Range is a vital part of the Tactical Trading system. You can study the results of varying Trade Ranges in Simulation. The Trade Range Oprtimizer will backtest various Trade Ranges and provide the range of profit outcomes.