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.