How to Trade Changes in Range?

[AgeKay 10]

I found out that in a certain market 85% of the time the range (day's high - day's low) of Monday is lower than the range of Friday. Do you know of any way to trade this observation?

 

Something like VIX does not exist for this market, so my first idea was to short options to profit from decreased volatility, but I am not sure if paying the bid/ask spread would be worth it. What are your opinions on this or do you have a better idea?

[ckait 10]

If you were in the trade already, where would your stop be? Thats where you enter the trade use a 20% of the range or the next support or resistance level for your stop. That will give you basically an 8 to 2 ratio pretty good if the market is really ranging. Thats one way.

[AgeKay 10]

You can't use it for stops since you don't know the high and low of the day until the end of the day. All you know is that the range is going to be smaller than the previous trading day. This is why I thought about trading volatility.

[ckait 10]

Guess I should have looked closer at your post. Take 20% off the high of friday enter there with your stop above the high same effect.

[Frank 10]

I am not advocating this but why not wait for range on monday to approach the range made on friday and fade price at that point for counter-trend move.

 

note that volatility is measure of 'returns' -- not range. 'returns' means the final close vs the previous close. thus, if you have a large gap -- you can have intraday range that is lower but 'volatility' will technically be higher if close is far away from the previous close.

 

range is very much correlated to volatility -- but its not the same thing.

[AgeKay 10]

note that volatility is measure of 'returns' -- not range. 'returns' means the final close vs the previous close. thus, if you have a large gap -- you can have intraday range that is lower but 'volatility' will technically be higher if close is far away from the previous close.

 

range is very much correlated to volatility -- but its not the same thing.

 

Thanks for pointing this out. I will check what the actual returns are. Do you know how I would trade the reduced volatility? I think that might be better than fading it.

[dam5h 10]

options are the only way i know of to trade the volatility that you are describing, perhaps that is why the spreads are wide here; no free lunch. also the other poster has a very good point in regards to gap exposure, did you include that in your investigation of range?

[AgeKay 10]

also the other poster has a very good point in regards to gap exposure, did you include that in your investigation of range?

 

no, i have not yet, but i will.