ExMasters Degree: Range Trading in Cryptocurrencies
Financial markets spend around 80% of the time in ranges every year. If you trade only trends, which is only 20% of a year, you will have to sit on the sidelines 80% of the time missing a lot of opportunities to make profits. The crypto market is not an exception.
You can use technical analysis if you want to figure out how to trade a range in cryptocurrencies. But before we go to how-to, let’s figure out what range trading is.
What is range trading?
A range is a movement of price between two price levels: high and low. The time frame when a range is formed can vary from 5 minutes to a few years on individual cases.
As we are not concerned with day trading at the moment, we would be looking at ranges that form within a time frame of a week and more. A trader who wants to do some range trading will have an opportunity to benefit from both buying and selling cryptocurrencies in a range.
A trader would go long (purchase) at the lower end of the range and short (sell) at the higher end of the range. Unlike in trend trading, in a range, a market has no direction, no support or resistance but the price is jumping up and down like a bird in a cage.
This type of trading strategy is also similar to swing trading as a range trader can capitalize on both going long and short. The difference is that swing trading is a strategy that can be used in trends, ranges, and even day trading, while a range is a market state, where the market is consolidating after a trend.
Types of ranges
Despite the fact that the price moves up and down in a range, it can do it in a different fashion. Ranges can be different in the size and type of movement. Let’s briefly look at each one of them.
This is a very common type of range. It takes the shape of a box and the price in it moves horizontally up and down without moving outside of the upper and lower bands of the box making the price movements essentially range bound. Below you can see a boxed square range on a 4-hour time frame.
The BTC/USD currency pair was in a non-directional state for over a month, from the 24th of November, 2019 till the 7th of January, 2020. The 7,600–7,800 area served as resistance (the upper band of the range) on a number of occasions and the 6,600–6,400 area acted as support (the lower band of the range) on 2 instances. Eventually, the range was broken through the upward band on the 7th of January.
A sloping rage can be moving upwards or downwards within a price channel jumping between the upper and lower trendlines before it breaks out of the range. One can trade a range by simply purchasing a cryptocurrency at the lower part of the range and selling it at the upper part.
This type of crypto range trading is directional and you would better place more focus on trading in the same direction as market moves because the odds are much greater for you to make profits. On the other hand, taking a counter-directional trade is also an option that should be on the table for more active traders to draw benefit from upwards price movements.
Trading a narrowing range can be a challenge as it typically ends with an explosive breakout. This type of range starts as a large one and week by week and day by day gets narrower. A trader can use trendlines to figure out where the next high and low points of the range will be and where the best levels for range trading are.
In the chart below, you can spot how the range in BTC/USD started as a broad one on the 19th of September and how it gradually got narrower till it had nowhere to go but break out on the 8th of October. You can use trendlines to define the perceived resistance levels and support levels for the range and spot where potential breakout points will be.
The mechanics behind trading a range in cryptocurrencies
How to enter a trade? Basic cryptocurrency range trading strategy
With all the ranges defined, we can apply basically the same rule for entering a trade in the cryptocurrency markets for all types of ranges. You should buy when the price approaches the low of the range and sell (short) when the price approaches the high of the range.
Trendlines should help you to spot the exact entry point. Similarly, candle patterns will aid you in confirming the entry point. You can see how the price quickly retraces when hitting resistance or support areas forming long shadows in candle patterns, indicating that strong buying started at support or heavy selling at resistance. Trendlines are a good indicator showing when the pair is overbought and oversold.
When a trader sees the confirmation with candles he can initiate a trade in the direction of the move. Refer to the chart below.
Where to place a stop-loss?
When you are cryptocurrency trading a range, you should not risk more than 5% of your equity on a single trade. Risking more is not advisable as a range may be small and there may not be enough space for the profit, which should always be bigger than your risk.
The risk/reward ratio has to be at least 1:2, and you also need to make sure you have good odds so that the ratio is realistic. If there is no potential for that type of risk/reward, you may even consider skipping the trade altogether.
On the other hand, If there is potential for 1:2, then, you should place your stop-loss under the most recent bullish candle when you buy, and above the most recent bearish candle when you sell.
Where to take a profit?
Ideally, you want your take profit target to be double the size of your risk. If the range is wide, you can aim for more 1:3, maybe even 1:4, or 1:5, depending on where you have placed your stop-loss. This is a crucial rule if you want to stay in the game for the long run. You can’t always be right, so if your risk/reward ratio is 1:1, you have to be right every second time just to break even.
On the other hand, if your risk/reward ratio is 1:3, you can be right every fourth time and break even. If you are buying at the lower part of the range, you should set your take profit at the high of the range, and vice versa, if you are selling at the high, you should take profit at the low.
Tip: Avoid entering a trade in the middle of the range as you will not get great odds to make a profit that is larger than the potential risk.
How to spot a change in the market state?
Although markets spend 80% of the time in ranges, eventually the ranges get broken and a trend starts. It is easy to spot the change. When the high of the range is broken, it means an uptrend started and you should avoid trading against the prevailing trend. When the low of the range is broken, we assume a downtrend has started and you should no longer use a range trading strategy, but prepare to sell short.
To sum up
As cryptocurrencies range for the biggest part of the year this strategy is suitable for most traders on cryptocurrency exchanges, especially those, who are more active. Price may bounce between highs and lows, which gives a trader an opportunity to place from 1 to 3 trades in a 1–2 week period on a single crypto pair. You can trade 5–6 or even more crypto pairs and have more than 15 trades per week. However, do not forget to implement a correct risk/reward ratio to maximize your earning potential and reduce your risks.
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