Range Trading Strategy: Strategies for Trading Ranges

Intro

One easy and simple way to make a profit in the crypto markets is to take advantage of the price action at support and resistance levels. A common situation in crypto trading is dealing with ranges, which are price consolidations over time within defined levels of supply and demand.

Range trading strategies are essential to address the market, letting traders of all levels execute trades even during non-directional seasons in the price action. In this article, we will discuss some of them.

How Does A Trading Range Work

Range trading is based on the principle that markets tend to consolidate into a sideways movement during particular periods. Ranges emerge as phases where traders and investors can decide whether to accumulate or distribute their positions, which means selling all or just part of their trades and buying or adding more to current positions.

Choosing whether to sell or buy during ranges will depend on the causes behind the price movements. Generally, a range can be a sign of indecision across investors and traders, who lack technical information to make decisions. This subsequently leads to a balance of forces between bearish and bullish sentiments.

The equilibrium between buyers and sellers will manifest through demand and supply zones recognized as support and resistance. During market ranges traders will find the price bouncing off support levels and being rejected from resistances. This dynamic will be the opportunity for strategies based on trading ranges.

Which Markets Can Suit A Range Trading Strategy

High-liquid markets like Bitcoin can offer opportunities to capitalize on ranging markets. The volatility of this market is also something to consider. Volatile conditions during ranging markets will move the price sharply, moving it from support to resistance zones rapidly.

These conditions can be risky but profitable.

A range trading strategy that considers volatility as a condition to capitalize, can be used in a market like Bitcoin. As the crypto market is full of volatile assets and Bitcoin has dominance over the rest of cryptocurrencies, almost any crypto market can suit range trading strategies.

Where to Identify Ranges

Identifying well-defined range markets is an important step in crafting effective strategies. Traders can find ranges after a trend or some strong move, where the market can start phases of accumulation or distribution. Determining which type of range we want to identify is also crucial.

Three types of ranges can emerge:

• Squeezed Range
• Expanded Range
• Flattened Range

Squeezed ranges can be found in chart patterns like head and shoulders or in ascending/descending triangles. In the case of triangles, ranges will form dynamic support and resistance levels. This type of range is characterized by forming well-balanced lows and highs.

An expanded range is generally found in large consolidations of prices. For example, in the Bitcoin chart, you will find that after making a strong move with the hype of the ETFs in the US, BTC formed a range between 70,000 and 60,000 approximately. This type of range is characterized by forming lows and highs at different levels, generally by failed attempts of breakout.

Common Pitfalls Trading A Range: How to Trade Ranges

When trading a range, traders can face times of confusion or desperation due to the dynamic of the range movements. Price sometimes can get stuck in a small fluctuation before reaching the upper resistance line or lower support level.

Some common mistakes traders can make include:

• Overtrading: When the price of an asset is moving tricky, with no clear direction, traders can take misleading information leading them to execute the wrong trades multiple times, causing big losses.
• Overlooking key support and resistance zones: A trading range will be formed by an upper resistance level and a lower support. However, between those levels, other support and resistance formations can appear, establishing key zones of supply and demand.                                                                                                                                      
• Trading the middle of the range: A common situation when trading ranges is executing trades in the middle of the range, which can be riskier than executing trades in the resistance and support levels as the price can go in either direction, up or down.
• False breakouts: During the range phases, the market will attempt to break the range through the support or resistance levels. Failing to, will end in a false breakout. Often this movement can be intentional, caused by institutional traders trying to get liquidity by misleading novice traders.

Strategies for Trading Ranges

Breakout Trading Strategy

This strategy involves identifying key support and resistance levels and waiting for the price to break out of the range. Traders can execute a long or short position once the price breaks out of the range and closes above or below the support or resistance level.

Mean Reversion Trading Strategy

This strategy involves identifying the average price of an asset over a specific time period and using that as a reference point. When the price moves away from the average, traders can enter a position in the opposite direction, anticipating that the price will revert back to the mean.

Support and resistance strategy

This method is as simple as identifying relevant lows and highs that suggest strong demand and supply zones. Support should act as a level within the range where the price bounces up notably and resistance should be a level where the price bounces down rapidly.

Range Trading with Volatility and Volume

Traders can use technical tools to measure the volatility and volume of the range. By evaluating those aspects of the market traders can get insights into the strength of the range.

• A high volume range will offer sharp price swings, letting traders capitalize on the volatility rapidly at the cost of more risk.
• A low volume range will offer slow price movements, letting traders capitalize on the safest conditions at the cost of less volatility and, therefore less attractive opportunities.

Using Different Time Frames

The market can offer large ranges like daily and weekly. Using different time frames according to a specific trading style, traders can detect several opportunities during the range seasons.

• A weekly range can be spotted from the 4H time frame, aiming to capitalize on positions held for days over the week for a swing trading style.
• Using the 1H time frame, day traders could detect daily ranges aiming to capitalize on positions held for hours or several minutes.

Trading Styles And Range Strategies

Swing Trading Strategies: This style involves identifying expanded ranges, like daily and weekly price swings, and entering a position within the range when the price reaches the upper or lower levels. Traders will aim to hold the position for several days.

Day Trading Strategies: This style can look for ranges during daily price swings, and execute trades to make a profit from positions held for minutes or hours.

Scalping Trading Strategies: Scalpers can find several squeezed ranges to make quick trades, profiting from small price movements. Traders can enter and exit positions multiple times within a day, taking advantage of the price fluctuations within the range. 

Conclusion

Trading ranges properly will demand crafting strategies based on support and resistance, breakouts, volume, and volatility conditions. Trading ranges is a simple method that can suit different styles of trading like day trading, scalping, and swing trading.

In Altrady you can start crafting range trading strategies through a free trial account with paper trading.