Range Trading Strategy in Crypto
Range trading in crypto is an active investment strategy in which the trader or investor identifies a price range in which he buys and sells over a short period of time. For example, if a coin is trading at $35 and you anticipate it will increase to $50 in the next weeks, you should expect it to trade in a range between $35 and $50. You may try to range trade it by buying the coin at $35 and selling it if it climbs to $50. This method would be repeated until you believe the crypto will no longer trade in this range.
Figure 1Source: TradingView
Above is an example of the BTCUSD 4h timeframe. There is a range between 51957 (Resistance) and 45859 (Support). You can see that a swing trader can make use of the support and resistance of the range not only to trade the range but also in a breakout scenario.
Risks of range trading
One of the major risks of range trading is that it requires precise market timing, which in this context means predicting when and how long crypto will trade between two price levels. If the crypto price does not move in the direction you anticipate throughout your time horizon, range trading might result in losses.
What are some range trading strategies?
Since range trading entails identifying significant price levels, some technical analysis strategies employed with range trading include volume trends, support and resistance, and moving averages.
Importance of support and resistance in range trading
Support is a price level when demand is strong enough to prevent crypto or other investments from falling lower. The rationale is that when the price drops and heads to support, buyers become more determined to buy, and sellers become less willing to sell. Resistance is a price level at which supply is strong enough to prevent crypto or other investments from moving higher. The rationale is that when the price rises and approaches resistance, sellers (supply) become more inclined to sell, and buyers (demand) become less eager to buy. Typically, with a range trading strategy, you buy at support and sell at resistance.
Usage of volume in range trading
Volume is an important aspect of range trading. Analyzing volume trends may help you evaluate patterns and decide whether the timing is correct to employ a range trading strategy. Technical analysts think that volume precedes price; for a trend to be confirmed, the volume should rise in the trend's direction.
Usage of moving averages in range trading strategy
Cryptos and other investments might be trending (i.e., going up or down) or non-trending (i.e., moving sideways). If you are completely aware of the risks of range trading, you should first establish if the market is trending or not, using a time period that corresponds to your strategy. A range trading strategy may be used if there is no trend (the crypto or other investment may be trading in a range). However, if the crypto or other investment appears to be trending in a particular direction, the benefit of a range trading strategy is likely to be negated.
How to set up a range trade?
If you believe you've identified a range-bound trade, consider placing a buy order around a price level you've identified as a support price. Consider placing an order around a price level you've identified as a resistance price level to finish the trade. These support and resistance levels might be a moving average or another price level that you've identified as important.
Disclaimer: This is content is purely for entertainment purposed not does not constitute financial advice.