It’s not overrated to say that Bitcoin has been in a slumber for most of time during the last three months. This is evident in the overall crypto market sentiment—the majority are just waiting and sitting this period out, in hope to see some confirmations made by Bitcoin before making the next move.
This period of sideway action by Bitcoin is what we would call – Range Trading. What should you do during this time? Is waiting the only option? Or are there gains to be made when BTC is range bound? If yes, how do you even trade in range? And most important, how long can this last?
That’s what we are delving into today – how do you trade the range and be successful at it?
What is a trading range?
Before we discuss trading range, let’s take a look at what is considered a range? You could often hear crypto enthusiasts saying “BTC is in a range.”
When an asset is ranging or range bound, it means that price is moving back and forth between higher price and lower price. During such a time as this, it is often choppy, sideways and flat. This would be what most deem as – a boring market.
Unlike a trending market where either the upward or downward trend is clearly indicated and confirmed, a range bound market is the opposite of that.
The financial markets have two major states, they either move in a trend, it can be bullish with a series of higher highs and higher lows. On the other hand, the prices can also move in a downward trend.
However, you will agree that this would be a bit too easy. It would be enough to start shorting on the first lower high. A good part of the time, the markets also move flat, in range trading. A current example of this is the evolution of BTC between 33k and 46k.
What to do during a range?
Refrain from trading
This is a statement that bags many opinions as there are different types of traders in the market. Allow us to explain: You may find success in trading a trend-following system which works very well in a trend. However, if you are still at the beginner stage of trading, we would suggest that you absolutely refrain from trading the range.
This is because in times of a trading range, or whenever you detect one, it is very common for a trend-following system to generate countless false signals, negating all the efforts you made during the previous bull run. As explained above, range bound trading is very choppy and in a short time frame, it can be extremely volatile, with no clear indications and the lack of confirmation.
As such, a trend-following system will generate countless false signals during a range period and negate the efforts you made during the previous bullrun.
Use another system
It is possible to use another trading system, such as an oscillator-based system. Oscillators work very well during a trading range, and it is best to buy the low end of the range and sell the high end.
However, this requires more practice and is a strategy best used by experienced traders. You need to be even more careful to avoid making mistakes that could cost you dearly. You can see an example of a range trade below.
We clearly see that the oscillators coincide with the approach of the support or resistance. However, before we can trade, these must first be established and then we enter the second key.
There are a multitude of strategies that work in range trading and we have deliberately given a simple example here. As with any other strategy, preparation, backtesting and self-control will remain the main factors for success.
Trading end of a range or breakout
The strategy outlined above works very well in range trading, but as with trends, ranges don’t last forever. That’s why we advise you to use a stop-loss just above the first high point for a short and below the first low point for a long. You can trade the same support or resistance several times but it is better to do it at the first retest.
We can determine the end of a range in the same way as for the beginning of a trend, with first a high point, above the previous one in the case of a breakout from above, followed by a higher low point. The reverse is also true for a breakout from below.
Prior to making your next trading move, it is important to have a clear understanding of which phase the market is at, based on the time frame that you plan to trade.
Just like any market, the crypto market vacillates between periods—between range expansion, non-trending or range contraction. Knowing which phase the crypto market is at before making an entry is crucial for many reasons. For one, it will help you gauge the level of risk. Next, it will help you decide which strategy and even time frame make the best deployment.
As the risk and uncertainties are a lot higher in range bound trading compared to trend trading, most traders look for confluence to achieve as high a probability as possible. And that comes with having a clear understanding of the overall key support and resistance zones is just as crucial.