Whether beginner or experienced, ranges can be a powerful tool in your trading arsenal. Learn how you can improve your trading with our comprehensive guide!
The crypto market is famous for its volatility and bull runs
- but if you look at the charts, you will realize that Bitcoin
also spends a good amount of time in ranges. Some traders prefer to call it Bitcoin’s “sideways trend.” Whether you are a trader or a long-term investor, it is important to understand what ranges are to determine potential entry and exit points. Let’s dive into range trading and see how they can help you get your feet wet in the world of trading!
Many new traders flock to crypto during bull markets
. This makes perfect sense, as these crypto bull runs are one of the easiest trading environments. Crypto Twitter refers to it as “genius season” for a reason.
Sadly, the bull markets eventually come to an end, and a sharp bear
trend follows. This leads crypto into hibernation. Trending markets are not as common as you may believe. Despite this fact, most traders ignore the rangebound markets. They find them difficult to trade and unrewarding. After all, they entered the market during a strong bull trend, so being forced into a tight range feels a bit dull. Nevertheless, trading ranges offer excellent opportunities and they should not be ignored.
A trading range is a price area in which an asset repeatedly trades up and down. The top of this area (resistance
) is often referred to as the range high, controlled by the sellers. The buyers are in control at the other end of the range (support
), or the range low.
These trading ranges often become dominant after a period of trending price action, and allow the market to cool off. For example, after a strong move, the price spends some time in a rangebound environment, until the moving averages
catch up to the price.
As discussed, trading ranges offer potential trading opportunities - not only when the price is inside the range, but also when a new trend kicks off. When a price manages to break out of a range, a strong move often follows.
Different Types of Ranges
There are a few main types of ranges depending on the characteristics. For example, a distribution
often happens at the end of an exhausted bull trend, where big players offload their positions onto unsuspecting buyers.
The bullish counterpart of the distribution range is an accumulation range
, which often happens after an extended bearish period. In this range, experienced traders take advantage of stable prices to take large positions before the market starts making its way back up.
Finally, the range type we’ll see a lot in the coming bull market is the re-accumulation range. Like the accumulation range, it is a period where experienced traders buy sizable positions before another leg up. The difference is that the re-accumulation range comes with a smaller consolidation
period, as part of an overarching uptrend.
Trading the range is not as simple as merely buying and selling at the range extremes. At times, it does work in that manner — but most successful range traders use a combination of volume, candlestick patterns
, liquidity analysis and moving averages to take advantage of rangebound environments.
Also Read: How to Use Volume in Crypto Trading?
Experienced range traders enter and exit positions around range extremes when their preferred analysis methods line up around these areas. The more indicators point in the same direction, the more confident the traders are.
For example, a range trader would likely enter positions on the liquidity
grabs (marked red in the chart below); a short trade when the upside liquidity is taken, and a long trade when the downside liquidity runs out.
Range traders take risk management measures to protect themselves against the inevitable breakouts/breakdowns that mark the beginning of new trends. Because of this, and the fact that ranges tend to narrow over time, these trades are more profitable in the middle of the ranges.
In addition to trading the range, many investors use ranges to be early to trend shifts or to get into trends. After all — as discussed earlier in the article — a breakout from a range often results in a strong move.
Breakout traders use the same indicators
as range traders. Trading volume
, for example, can be used to determine if a breakout is strong enough to take positions, or if it is wise to wait for the market to retest the range.
They also look at the type of market and compare it to the direction of the breakout or the type of range that the market is in. Breakouts that match the direction of the market are far more likely to result in further upside, whereas breakouts that go against the direction of the market often turn out to be mere deviations, or fakeouts
Also Read: Breakout vs Fakeout (False Breakout) — Spot the Difference and Increase Accuracy
Fakeouts happen when the market breaks above the resistance level
(or range high), but then quickly falls back into the range. This catches a lot of traders off guard (also called a bull trap
). It becomes especially costly when traders fail to manage risks, as a fakeout often results in the price quickly moving to the other end of the range.
All in all, there are plenty of ways to make money in a rangebound environment. Even though it might not be as exciting as a strong bullish trend, we recommend taking time to learn how ranges work, so that you can take maximum advantage of the opportunities that present themselves in such environments.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.
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