Still on trading the ranges

It seems that my previous article on trading the ranges either fascinated the readers’ imagination or aroused their suspicion if it really works.

Trading the ranges is one of the so-called two classic ways to succeed in the stock market. It involves the use of a market strategy that makes one become what is known as “picker” or “follower.”

The “pickers,” in old accounts, “are those who try to pick a bottom or pick a top.” Meaning, they strive to pick the bottom price of a stock as well as its top price.

They use technical tools that can help in predicting the next market turn and—to use the exciting words in the old narrative – “will help them get in before it (the stock) really makes its move and get out just before it heads back in the other direction.”

The “followers,” use a different and more conservative principle. The old narrative presents it as follows: “Rather than trying to catch the entire move, from top to bottom, their brand of technical analysis is geared to giving them ‘confirmation’ that the market is indeed trending in one direction or another. Then, and only then, do they jump on board.”

The words “picker” or “follower” were evidently taken from the operating principles behind the said trading approaches.

At present, the concept of trading the ranges does not necessarily start in buying first as in buying long, then selling afterwards. It also makes use as well of the other process: One starts to sell first like shorting the stock or your existing position, then buying it later.

Current trading rules allow one to short a stock as long as one has the shares to deliver. This means you can short a stock only if there are shares you can borrow.

September performance

September seems to be a good fit to trading the ranges looking back at the market’s behavior during the month.

On the first week of the month, the market made a weekly gain of 212.69 points or 3.02 percent as it settled at 7,263.58. The market was particularly strong as daily value turnover ranged from the low of P8.41 billion to the high of P12.42 billion, which on the average amounted to P10.80 billion per day.

As such, the market appeared to be particularly moved by buying more than selling activities. This seemed to have been triggered by the trading activities of foreign investors. Their participation in overall transactions for the period amounted to 52.51 percent. This was significantly higher than their participation of 51.15 percent year-to-date average.

This signified, as well, that foreign investors’ initiatives were particularly responsible for the market’s overall advance.

On the second week, the market incurred a pullback, allowing the chance to buy back. The market suffered a weekly loss of 61.70 points or 0.85 percent as it settled at 7,201.88.

Again, this seemed to have been caused by the direction and nature of foreign investors’ transactions. This was because foreign investors’ transactions only amounted to 47.68 percent, thereby, signifying that their selling activities for the period served to pull down the market aggravated by the fall in average daily value turnover to P8.34 billion.

For the third week, trading was limited to four days because of Tropical Storm “Mario.” It cut short the market’s ongoing rally, again, spurred by foreign investors’ transactions that climbed higher to 48.23 percent for the week.

Masked by the seeming spike in foreign investors’ participation to overall market transactions during the week was its declining nature. Foreign investors’ daily participation was actually going down toward the end of the week.

This may explain the market’s weak performance that culminated in a weekly loss of 25.99 points or 0.36 percent on the fourth week, where foreign investors’ participation in the market further decreased to 47.41 percent. It was at this period that trading the ranges was profitable to big ticket stocks.

When the market closed on Sept. 30, however, it was up 17.71 points or 0.24 percent propped by a value turnover that amounted to P12.48 billion for the day and P15.71 billion the day before, boosted by block sales that amounted to half that of total value turnover.

At this point, as the market settled at 7,283.07, the market was up 232.19 points or 3.29 percent.

By the end of trading last week, however, the market’s overall gain was trimmed down to 196.15 points or 2.78 percent, which further provided support to the strategy of trading the ranges.

Last week was ripe for both buying and/or selling. Buying should have been confined to growth stocks while selling would have been confined to speculative stocks.

Bottom line spin

Trading the ranges allows one to enjoy a comparatively limited risk exposure in the market by its obvious shorter holding period.   However, trading the ranges requires precision in capturing the price movement of the stock. A mistake in timing could result in what is called whip lash. That is, you lose in both ends of the trading process, like in buying when you should have sold and selling when you should have bought.

This investing strategy does not fit all types of personalities. It requires certain personal traits to be gainfully used—you must not be overly eager or too slow in making your trading moves.

By the way, October is a tricky month because it is especially volatile and dangerous. Trading the ranges is a good fit. Yet, I would advice that it be used in making your final position for the year.

The writer is a licensed stockbroker of Eagle Equities, Inc.. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com