Understanding High Minus Low (H-L)

The term High Minus Low (H-L) refers to the difference between the highest and lowest price of an asset during a specific time period, such as a trading day, week, or month. It is a critical indicator in technical analysis, reflecting market volatility. The wider the H-L range, the more volatile the asset, whereas a narrow range often suggests consolidation or low activity.

The H-L metric is a simple yet powerful tool that traders use to derive insights about price action and market behavior. By analyzing H-L patterns, traders can identify breakout opportunities, assess volatility, and refine entry and exit points. Let’s explore some effective trading strategies built around the H-L concept, covering different market conditions and timeframes.

1. Breakout Strategy

Concept:

A breakout occurs when the price moves outside a defined range. The H-L can be used to identify potential breakout points. When the price breaches the high or low of the previous period’s range, it may signal the start of a new trend.

Application:

  • Bullish Breakout: Enter a long position when the price moves above the previous day’s high.
  • Bearish Breakout: Enter a short position when the price falls below the previous day’s low.

Example:

In a daily chart of a stock, assume yesterday’s high was $50 and the low was $48. If today’s price crosses above $50 with increased volume, a trader could enter a long position. A stop-loss can be placed just below $50 to manage risk.

Market Conditions:

  • Works best in trending markets or during high-impact news events.
  • Avoid in choppy or sideways markets to reduce false breakout risks.

2. Mean Reversion Strategy

Concept:

Assets often revert to their average price after extreme movements. Using the H-L range, traders can identify overbought or oversold conditions and anticipate a reversal.

Application:

  • Identify days with an unusually wide H-L range compared to historical averages.
  • Enter a counter-trend trade near the extremes, expecting a return toward the average.

Example:

Suppose a stock typically has a daily H-L range of $2. On a particular day, the range expands to $5, with a high of $55 and a low of $50. If the stock touches $55, a trader could sell short, expecting a reversion toward $52.5 (midpoint).

Market Conditions:

  • Suitable for range-bound or mean-reverting markets.
  • Avoid during strong trends where price may not revert.

3. Inside Bar Pattern

Concept:

An inside bar occurs when the current period’s H-L range is completely contained within the previous period’s range. This often signals a period of consolidation before a breakout.

Application:

  • Wait for an inside bar to form, indicating reduced volatility.
  • Place buy and sell stop orders just outside the inside bar’s range to catch the breakout.

Example:

If a stock’s H-L range yesterday was $60–$55 and today’s H-L is $58–$56, traders could set a buy order at $58.10 and a sell order at $55.90. Whichever order gets triggered indicates the breakout direction.

Market Conditions:

  • Effective in consolidating markets preparing for a move.
  • Works across all timeframes.

4. Average True Range (ATR) Expansion Strategy

Concept:

The ATR measures average volatility over a set number of periods. Comparing the current H-L to the ATR can help identify when volatility is expanding, signaling a potential move.

Application:

  • Look for days where the H-L range exceeds the ATR by a significant margin.
  • Trade in the direction of the breakout, as high volatility often precedes strong trends.

Example:

If the 14-day ATR for a stock is $3 and today’s H-L range is $5, this suggests an expansion in volatility. If today’s close is near the high, a trader could enter a long position, expecting continuation.

Market Conditions:

  • Ideal in trending markets or during significant news releases.
  • Avoid during periods of low market activity.

5. Volatility Contraction Breakout

Concept:

Periods of low H-L volatility often precede high-volatility moves. Traders can monitor for tightening ranges to predict breakouts.

Application:

  • Identify a series of days where the H-L range narrows progressively.
  • Enter a trade once the price breaks out of the tight range.

Example:

Suppose a stock has daily H-L ranges of $4, $3, and $2 over three consecutive days. A breakout above the high of $52 or below the low of $48 could signal a strong move.

Market Conditions:

  • Works well before earnings reports or economic announcements.
  • Effective in all timeframes.

6. Gap and Go Strategy

Concept:

Gaps occur when the opening price is significantly higher or lower than the previous close. The H-L range helps determine whether the gap is tradable.

Application:

  • Measure the H-L range of the first 30 minutes of trading.
  • Enter a trade in the direction of the gap if the price breaks above the high or below the low of this range.

Example:

If a stock gaps up from $100 to open at $105, and the first 30-minute H-L range is $106–$104, entering a long position at $106.10 could capture further upward momentum.

Market Conditions:

  • Suitable for high-momentum stocks and news-driven markets.
  • Best in active markets with high liquidity.

7. Dual Timeframe Analysis

Concept:

Using the H-L range across multiple timeframes allows traders to align trades with broader trends.

Application:

  • Use a higher timeframe (e.g., weekly) to identify significant H-L ranges.
  • Trade breakouts or reversals within those levels on a lower timeframe (e.g., hourly).

Example:

If a weekly chart shows a high of $200 and a low of $180, a trader using an hourly chart could look for breakout trades when the price approaches these levels.

Market Conditions:

  • Works in trending and range-bound markets.
  • Effective for swing trading and intraday strategies.

8. False Breakout Reversal

Concept:

Not all breakouts sustain momentum. Traders can capitalize on false breakouts when the price quickly reverses after breaking a key H-L level.

Application:

  • Enter a counter-trend trade after a breakout fails and the price returns within the range.
  • Place a stop-loss beyond the breakout level to manage risk.

Example:

If a stock breaks above $150 (previous high) but quickly drops below $148, a trader could short at $148, targeting the mid-range of $145.

Market Conditions:

  • Effective in choppy or consolidating markets.
  • Avoid during strong trends.

9. Momentum Scalping

Concept:

Scalpers use the H-L range to capture quick profits from intraday volatility.

Application:

  • Identify the H-L range of the first hour of trading.
  • Trade small movements within this range using tight stop-losses.

Example:

If a stock’s first-hour range is $55–$53, scalpers could trade bounces off $53 and rejections at $55 for small, frequent profits.

Market Conditions:

  • Suitable in high-volatility markets.
  • Requires highly liquid assets.

10. High-Low Channel Strategy

Concept:

Plotting the H-L range as a dynamic channel helps visualize support and resistance levels.

Application:

  • Use H-L channels on longer timeframes (e.g., weekly) to define key levels.
  • Trade breakouts or reversals at the channel boundaries.

Example:

If a stock’s weekly high is $120 and low is $110, traders can buy at $110 if it holds as support or short at $120 if it resists.

Market Conditions:

  • Works in all market conditions.
  • Effective for position trading and swing trading.

Conclusion

The High Minus Low metric is a versatile tool that underpins numerous trading strategies. By understanding and adapting these strategies to various market conditions and timeframes, traders can enhance their edge. Whether you prefer trend-following, mean reversion, or scalping, the H-L range provides actionable insights for profitable decision-making. Always remember to pair these strategies with proper risk management to navigate the complexities of trading effectively.