Bottom of the range: Difference between revisions

An asset’s “range” is the variation of prices at which it has traded over a period. The longer the period, the more meaningful the range and the confidence it might give you, [[all other things being equal]], about the likelihood of the asset’s price moving outside that range in a particular ''forward'' period. This confidence is a relative to the length of the forward period and the period of the range.

This is not science but [[heuristic]]; it owes little to advanced maths, quantitive modelling techniques or principles of probability (which typically do not work with [[complex adaptive system]]s) and a lot to the [[Lindy effect]], or the principle of [[mean reversion]]. In essence: if an asset has traded between 5 and 15 for the last decade, and is presently trading at 7, it is unlikely to trade at 20 in the next hour. It ''might'' do — but that would be surprising. The confidence level drops as the time horizon extends: it could trade to 20 in the next ''month''; it may well trade do so over the coming ''year''.

Corollary: if your asset has traded between 5 and 15 in the last decade, has been gradually declining, and it is currently trading at 5, it is not implausible to suppose it could go back to 15 in fairly short order.  This ought to be food for thought to short sellers, who stand to gain 5 at most.