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[vc_row][vc_column width="1/1"][vc_column_text]When markets are ‘quiet’, even the biggest global investment banks can find it tough as markets essentially move sideways over a period of weeks, months or even a full quarter. However, the humble day trader can still capitalise on this using the multitude of smaller, more frequent share price moves to turn an impressive profit.
This report provides a guide for the average trader on how to outwit the professionals by trading stocks in ranges, as well as analysing four of the most attractive UK 100 stocks that range-trading right now.
A trading range appears when an index, stock, currency or commodity trades within notable boundaries over a given period of time. The share price rises after reaching a key level of support – found at notable lows – and falls upon reaching resistance – regularly found at previous highs of note. These boundaries then create the ‘floor’ and ‘ceiling’ of a trading range which are revisited multiple times over the course of the pattern’s validity, resulting in several share price moves that can be individually traded in order to profit while shares are trending.
The most common trading ranges occur during a period of consolidation, a pause after a strong rally or sell-off as investors reposition themselves. Predominantly, they can be found within horizontal levels of support and resistance known as ‘rectangles’, although ranges can be found in uptrends or downtrends too.
The characteristics of a trading range are similar to those of cars changing lanes on a motorway, a ski slalom moving downwards between a set of flags or a road that zig zags up the steep sides of a mountain.
The current stock market climate is ripe for range trading; a lack of stocks making critical breakouts from previous highs or lows and a dearth of sharp or significant moves has left volatility at its lowest level in recent history. Even the professionals are struggling. 10 of the world’s largest 11 banks reported falling revenues in their pivotal Fixed Income, Currencies and Commodities (FICC) trading departments in Q2, including Goldman Sachs (-44%) and JP Morgan (-19%). This highlights the need for a change of strategy from traders worldwide.
Trading stocks that are rangebound allows traders the opportunity to profit multiple times from several price moves, rather than being reliant on a single rally or sell-off to turn a profit. By using a platform, such as a CFD account, a trader can take either a long or short position on a company, allowing them the ability to profit from falling markets as well as rising ones. In doing so, this enables the trader to profit from each individual move, while also being in the position to benefit from the eventual break-out or break-down from the current range.
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While a trading range may not necessarily react at the exact same price twice, being able to identify a key general level at which the price is likely to revert is the key to success when identifying trading ranges. By taking a step back and surveying the wider picture, trading ranges will likely become much clearer. The best range traders will be able to discredit anomalies to gauge the wider picture, increasing the number of potential profitable trades.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column width="1/2"][vc_column_text]
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The chart on the right represents another, albeit less clear, trading range, in which the stock rises and falls a total of 14 times.
While this example may be an extreme one, it shows how once a trading range has been identified it can present a remarkable number of potential opportunities to trade.
Trading ranges such as this can be trickier to identify, however once they have been found, they offer potential trades over several months.[/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]
[/vc_column_text][vc_column_text]The chart on the left provides a visual representation of a notable trading range over the course of 18 months.
The share price changes are contained within notable boundaries (support at 255p and resistance at 320p).
After initially rallying from support at 255p to resistance at 320p, the shares then sold off in the space of four months. This then happened a total of five times.
By holding a single long position over the entire period, a trader would have seen a maximum return of 25%. By undertaking five separate trades, your return could have been increased fivefold, while reinvesting profits and holding the shares during the subsequent breakout could have seen an even greater return.
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Technical Observations:
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Most Bullish: Day by Day
Buy, Target 3789p, +24% (15 Jun)
Average Target
3231p, +5.4% (3 Aug)
Most Bearish: Exane BNP Paribas
Underperform, Target 2300p, -25% (10 Jul)
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Technical Observations:
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Most Bullish: Canaccord Genuity
Hold, Target 1575p, +16% (19 Jul)
Average Target
1352.7p, -0.2% (3 Aug)
Most Bearish: Liberum
Sell, Target 800p, -41% (1 Jul)
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Technical Observations:
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Most Bullish: Barclays
Overweight, Target 675p, +48% (2 Aug)
Average Target
493.75p, +8.3% (3 Aug)
Most Bearish: Macquarie
Underperform, Target 400p, -12% (7 Jul)
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Technical Observations:
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Most Bullish: SBG Securities
Buy, Target 14000p, +91% (31 Jul)
Average Target
8047p, +9.9% (3 Aug)
Most Bearish: RBC Capital Markets
Underperform, Target 5800p, -21% (3 Aug)
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Technical Observations:
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Most Bullish: Barclays
Outperform, Target 250p, +40% (25 Jul)
Average Target
194p, +8.4% (3 Aug)
Most Bearish: Credit Suisse
Underperform, Target 145p, -19% (26 May)
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Whether you see UK stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.
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The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)
If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!
Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.
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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research