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Trading Band

A trading band refers to a range within which the price of a currency, commodity, or financial instrument is allowed to fluctuate. Governments or central banks may use trading bands to manage their currency's exchange rate by intervening when the price moves outside the established range. For stocks and other assets, a trading band can also refer to support and resistance levels that limit price movements during normal market conditions.

Example

China's central bank sets a trading band for the yuan, allowing it to fluctuate within a 2% range above or below a fixed reference rate to manage currency stability.

Key points

• A price range within which a currency, stock, or commodity can move.

• Often used by central banks to control currency exchange rates.

• In stocks, refers to support and resistance levels that limit price movements.

Quick Answers to Curious Questions

They intervene by buying or selling currency when it moves outside the established range, maintaining stability.

It helps traders identify potential buy or sell points, as prices tend to fluctuate within the band unless there’s a breakout.

They can reduce volatility by providing stability to prices within a specified range, though a breach of the band can lead to significant price swings.