Also known as a distribution range, a distribution area is the range of prices in which a particular stock has traded for an extended period of time. Investors often benefit from evaluating this price range when making decisions regarding buying or selling shares. Along with identifying the time frame that the stock price has remained within the defined area, determining the reasons behind the price movement can also make the task of predicting future movements somewhat easier.
While there are a number of different strategies that involve assessing the price movement of a given stock, the distribution area focuses on taking a snapshot of that movement over a long period of time. The idea is to determine how different events generate some influence in both short-term and long-term movements within that range. By doing so, investors gain insight into what causes that particular stock price to move upward, and what can cause the price of the shares to move downward once more.
As part of the ongoing technical analysis of the stock, the data that is derived from the distribution area is helpful with both purchasing and selling shares of stock. By accurately predicting how the stock will react to upcoming events, an investor can identify the best point in time to either purchase additional shares or place those shares up for sale. With both approaches, the goal is to protect the integrity of the investor’s portfolio, making it possible to maximize returns while also minimizing the potential for sustaining some type of a loss. With some strategies, the assessment of the distribution area may lead to the development of a strategy to sell the shares at one point, only to repurchase them at a later date, avoiding a loss and generating returns as a result of the overall strategy.
There is no defined time frame that must be applied to a distribution area. Some investors will consider a range that is no more than six months, while others will examine data that relates to price movements over a year or more. The duration of the distribution area is often based on the goals of the individual investor, and how shifts in the price of a given security over time will either help or hinder the reaching those goals. As with any investment tool, using the data gleaned from this type of approach with the highest degree of efficiency will increase the chances of making accurate predictions for the future and moving the investor closer to achieving his or her goals.