As the name implies, range segmentation is a method by which the price of a particular stock is divided into major price ranges, and further subdivided into minor price ranges , through identification of midlines, or points that fall between each set of ranges. These allow the trader to identify profitable entry and exit levels / either at bounce points or at breakout points.
Its main advantage is in compartmentalizing prices in order to determine more precise , more manageable trades. The concept of price ranges had long been used by stock market traders internationally. Here are examples of a few of those applications:
Anchor Zones: 2012
One example of written work that uses the concept of range segmentation is L.A. Little’s book, “Trend Trading Setups: Entering and Exiting Trends for Maximum Profit”, published in 2012. He offers a simplified view of trading where only two basic trade setups exist: retracements and breakouts. Prices create points at which they oscillate , which are the basis of range trade setups, within which prices constantly “test” the borders of the range.
He uses anchor zones that are identifiable through anchor bars. Anchor bars are identified through one or more of the following:
This chart by Trading Setups Review applies anchor zones :
Darvas Box theory: 1956
The Darvas box theory is a momentum strategy that is based on price highs , which represent the ceiling of the box , and price lows which represent the floor of the box. When price breaks through the ceiling , the trader is supposed to buy the stock. When price goes below the box, the trader is supposed to sell. Here is a broad example using AGI:
In a broad sense, prices are also segmented, albeit in boxes.
The 50% Retracement rule: more than 30 years ago
The 50% Retracement rule states that prices (of bullish instruments) tend to retrace by 50%, (the midline) up to a maximum of 62%, and bounce during a healthy correction, . However, prices of uptrending stocks that fall below the 62% extreme, are considered to have reversed and are bearish.
This is similar to the midline concept , that determines price strength or weakness.
This rule had been used internationally in trading stocks, precious metals, commmodities, futures and foreign exchange for decades.
An example of 50% Retracement Swing trade
Back in in June 2015, I tried to segment ranges using lines and midpoints, by initially finding historical peaks and troughs. Then I used a calculator to divide each identified segment into halves . This allowed me to predict bounce points on AGI for the next few months.
Range segmentation on AGI, as of June 2015
The major points would likewise be identifiable had I used the Anchor zones. The price ranges would also have been the same, if not quite close, had I used Darvas boxes, and computed for target points using box increments. The midlines would also be manifested had I used the 50% retracement rule on each segment.
Anyway, the point here is this. Trading technniques and strategies evolve but they are just different ways of looking at the same thing. Range segmentation is not a breakthrough concept, either.
It had taken many forms, and had been applied in various ways throughout the history of the markets.
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