Range Trading Strategy: Identifying Trading Ranges

Intro

A typical situation traders can encounter when analyzing crypto charts is that the price moves sideways as it cannot establish a clear direction to follow. The price is moving from a high end to a low end, repeatedly forming barriers of support zones and resistance levels from which it is bouncing back consistently. This is what is known as a trading range.

In this article, we will address some aspects of range-bound markets for the right identification of these seasons.

What is a Range In Crypto Trading

Range trading strategies are characterized by their simple approach to markets, avoiding long-term changing conditions and trying to overcome volatility while taking advantage of short-term price swings. After all, ranges are not sophisticated seasons in the market but phases carrying indecision and where traders choose whether to accumulate or distribute their positions.

Key aspects to identify trading ranges

• Trading ranges are essentially dealing with support and resistance levels only, which makes them easy to understand and apply strategies to it.
• After a strong move, markets tend to enter a range phase.
• It is a phase of indecision leading to accumulation and distribution.
• Suitable for different trading styles.
• The price is repeatedly bouncing in a sideways path.

Why Markets form a Range

Crypto markets base their attractiveness on volatility, which causes sharp price movements and trend momentum, often leading to substantial moves sustained over time. Those types of movements will form changing market structures as they manifest trends and consolidation phases.

A range will appear, as mentioned previously, when the price goes sideways, forming support and resistance levels repeatedly. This happens because the bearish and bullish traders find a balance between their forces. Neither group can overcome the other.

Fear and greed in ranges

A range can strengthen as the phase consolidates over time, generating indecision among traders. Two sentiments can emerge from an indecision range that can then impulse a breakout move:

• Fear: After an upside move or an already established uptrend, traders will be fearful of a down reversal. 
• Greedy: After a downside move or an already established downtrend, traders will be greedy when an upside move appears. 

Identifying Trading Ranges

Ranges are simple market conditions, but to identify a well-defined range, we must address some concepts that will take place in it. Concepts like:

• Support and resistance: This is a technical concept that states that the price will be rejected from a high-end to a low-end level or vice versa. This means it is expected for the resistances to act as a supply zone, throwing the price down ; and for the supports to act as a demand zone pushing the price up.
• Candle patterns and price action: Range traders could find the price forming various candle patterns like shooting or evening stars or the morning star. This price action should be consistent over time to identify a genuine range.
• Reduced volatility and volume: Ranging markets are detectable through a constant decreasing volatility. Volatility can be measured with the volume indicator and the size of the candles. A range could start with volatile moves, but as it begins to consolidate, the volume could remain without surging peaks as the volatility and size of the candle decreases.

Size of the range and profitability

A well-defined range will perform within an acceptable size. Identifying ranges considering their sizes can be crucial for traders who aim to make a profit. The more squeezed ranges will not offer the best opportunities compared with those opportunities found in expanded ranges.

The liquidity of a crypto market will play a role in determining the size of the range and how much the price runs, forming larger or shorter candles. Depending on the underlying volatility, a range could have:

• Equal lows and highs.
• Dynamic support and resistances.

Types of Trading Ranges

The size of the range will help traders to detect different types, like the following:

• Squeezed Range: Generated by very short candles, low volume liquidity, and volatility, offering poor profits. This type tends to have equal lows and highs.
• Expanded Range: Generated by very large candles, high volume liquidity, offering great profits. This type tends to have dynamic support and resistance as volatility takes action.
• Flattened Range: This range is characterized by well-balanced supply and demand price action, offering the safest trade opportunities.

Using Bollinger Bands for Trading Ranges

Bollinger Bands is a technical indicator with unique features to address volatility and identify ranges.

Made of two bands, one upper and the other lower, when those bands flatten, traders can expect a possible range formation.

• Expanded bands will suggest bigger ranges.
• Squeezed bands will indicate smaller ranges.

Trading Styles for Ranges: Comparative Table

Conclusion

Identifying ranges in the crypto market can be a simplified and easy way to capitalize on bouncing price movements and phases in which the market is not going in a clear direction.

Trading ranges can be profitable but this will depend on the right identification as not all ranges will offer good liquidity conditions. 

In Altrady you can start identifying range trading opportunities through a free trial account with paper trading.