RANGE TRADING STRATEGY
It is basic info to even the most amateurish of traders that there exists a vast array of technical analysis strategies and tools available to make calculated and winning trades. While traders usually combine several tools to make even more accurate predictions in the market, which ones would make prominent weapons in their arsenal is usually down to personal preferences. However, there are some tools and indicators that are so popular and important, that hardly any trader or analyst fails to regard them. There are hardly any bigger examples of these than support and resistance tools, indicators especially important to the formation of the Range Trading Strategy.
Before delving into what the Range Trading Strategy is and how it works, it is imperative to examine what exactly a trading range itself is. A trading range is a situation in which a cryptocurrency’s price action shuffles between consistent high and low areas for a period of time. The candles move back and forth within a particular region of the market, forming a price channel. The highest point in a trading point is usually referred to as resistance (as it resists prices from moving beyond it into upper reaches); while the lowest point is usually referred to as support (as it serves as the base of support the rest of the range stands).
Having this in mind, the Range Trading Strategy can be simply defined to mean a trading strategy focusing on studying trading ranges and riding the price movements that occur within them. Range-bound trading seeks to study, identify, and exploit markets trading in price channels. After identifying major support and resistance levels (major because there might be several support and resistance levels that would appear, but require a lot of care to determine how reliable they are), they are connected to each other using horizontal trendlines. That being done, the simplest way to utilize range-bound trading is to use support areas as entry points for trades and the resistance areas as exit points. The strength of the support and resistance levels is proportional to the strength of the trading range. It is quite easy to profit from strong ranges by buying and selling at support and resistance levels respectively as it the market is highly predictable in that phase, and the trader can maintain a high probability that the prices will keep moving between the two levels. This is best combined with other indicators like the Relative Strength Index, which would help confirm the imminent price movements.
Another way to profit in the market using the Range Trading Strategy is by riding breakouts and breakdowns. A breakout is a situation in which the resistance level is breached, and the asset’s prices begin to tend towards a sharp rise. The opposite of a breakout is a breakdown, which is a situation in which the price action starts moving below the support level. Generally, the occurrence of a valid breakout or breakdown signifies the end of the range. Not all breaches of support and resistance levels constitute breakouts and breakdowns though, as the range tends to recover from a fake breakout or breakdown. Traders usually combine different technical analysis indicators to confirm the validity of breakdowns and breakouts, but perhaps the most effective option is to look at the volume that accompanies the move. This is based on the basic theory that volume validates an action in the market. Thus, if a breakout occurs and it is accompanied by a high volume, that means it is valid and the market players are affirming the price movement. Similarly, if a breakdown is accompanied by low volume, it means the general market is not approving that action and it is just a temporary market fluke.
A ranging period is normally a balanced period, with the market not tending towards a definite direction for that period of time. However, a breakout or breakdown after a ranging period is usually longer or stronger, depending on how extensive the preceding range is. This is also another function of range trading strategy, as it also gives traders help with the comprehension of information useful for the next operation.
From the foregoing, it can be seen that the Range Trading Strategy is truly a wonderful strategy with a surprising degree of simplicity, reliability, flexibility, and versatility. In as much as it sports all these qualities, the range-bound trading system is not exactly foolproof, and usually requires the confirmation of other indicators as well for better accuracy. With proper mastery of this strategy, any trader would be sure to cop in some profits even in relatively docile markets.
