Sep

18

Paolo Pezzutti on the Daily Range

September 18, 2006 |

Is it wrong to assume that every market has a specific "personality"? Players are different, the underlying security has different fundamental characteristics, the market structure (rules, procedures and technology of the exchange) may be different. If you take, for example, the average daily range/average price expressed as a percentage, you notice the difference. The NASDAQ has higher ratios than currencies or the S&P, therefore you would expect different trading opportunities. Short-term traders prefer higher daily ranges. But can we use this information to try and understand the "quality" of a move, provided that prices represent at any moment a balance between buyers and sellers?

When markets trend you would expect to see an expansion in volatility in the direction of the trend. That means bigger daily ranges in the direction of the trend. That implies that the public participation in the move is high and pushes prices higher. You can also experience low volatility trends, when prices drift higher without the classic thrusts. For example, the up leg started on the S&P, the NASDAQ and the Dow Jones which all have this characteristic. A low average daily range move may be a warning that this uptrend has not enough fuel to continue above certain levels? How do we test this concept?


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