Trading 101: What are the Three Different Crypto Market States & Why should You Know Them?

2021/09/15 10:10:51

It is a general misconception among novice crypto traders, speculators, and investors that the price of any crypto asset moves in a random direction. Some strongly believe that the price of cryptos is driven by fundamental factors such as demand and supply alone, while some believe that it is the whales who control the entire crypto market. Both the former and latter groups are right in their ways, but there is one crucial aspect of the price that they are missing -The Market States. It is the state of the market that drives the price for any certain period.

Both the prevalent opinions are interlinked, and the fundamental aspects of the coin, along with the moves made by institutional players combined, decides the market state of any cryptocurrency. If you are a technical crypto trader, and if you are interested in day trading and scalping, all you must worry about is in which market state the crypto you are trading is currently in. Based on that, you must decide on trading any given crypto asset class. Considering other news aspects for the day and the overall fundamentals of the coin goes without saying.

The Different States of the Cryptocurrency Market

The entire cryptocurrency market, or any financial market direction, is determined by two parties – buyers & sellers. The price charts of cryptos give us a lot of information about the market environment. We can easily assess market domination by using price charts. Depending on who's controlling the market, technical experts have segregated the markets into three different states, namely:

Trend
Range
Channel

The price of any crypto asset moves in these three different states. All the candlestick patterns, crypto chart patterns, etc., will eventually fall under either of the market states mentioned above. Every crypto technical trader needs to be aware of these market states to apply their strategy effectively. For instance, applying a strategy designed for a ranging market in a trending market could eventually fail. Now, let's understand what each of these markets is and how to trade them accurately.

What is a Trend?

In a trending market, the price of the crypto asset will be moving explicitly in one direction. This doesn't mean that the charts will be in a straight line. Of course, the price moves in another direction for a bit, but eventually, it resumes its original trend. In a trending market, we can see the price action of a crypto asset making Higher Highs, Higher Lows, Lower Highs, and Lower Lows depending on the prevailing market trend.

If the buyers are in total control of the market, we call it an uptrend. Contrarily, if the sellers are controlling the market, we call it a downtrend. In an uptrend, given crypto asset prices make a Higher High, experiences a pullback to any significant level nearby, and resumes the original direction to make a brand new higher high. The same applies to the downtrend as well. To understand this better, please check the snapshot below.

In the below Bitcoin price chart, it is clear that the market is trending. It represents the entire BTC bull run in the first quarter of 2021. As you can see, the price continued to make higher highs and higher lows, indicating a clear uptrend.

Formation of a Trend on the Bitcoin Price Chart | Source: BTC/USDT

What is a Range?

We say that the crypto market is ranging or moving sideways when the price does not create any Higher Highs or Lower Lows. Since you are reading this, we assume that you know the concept of support and resistance (S&amp;R) levels. In any given range, the price action of the crypto asset stays between given S&R levels. The formation of a range implies that neither of the parties is controlling the market. Both the buyers and sellers have equal strength, and therefore, they aren't able to make a higher high or a lower low.

Typically, the price in a ranging market starts its journey from the support level and reaches the resistance zone. It then drops back to the support and follows the same pattern for a while until the range ends. A general rule while trading ranges is to buy at the support and sell at resistance. Doing this without any confirmation is risky. Always consider trading a range based on the actual market direction. Meaning, when the overall market is bullish, consider buying at support only and refrain from selling at resistance. Always remember that the overall trend is your friend.

The below Litecoin chart is a right example in this regard as we can see the price moving in a sideways direction and staying within the range.

Formation of a Range on the Litecoin Price Chart | Source: LTC/USDT

What is a Channel?

We can consider 'Channel' as a combination of the 'Trend' and a 'Range.' In a channel, the price still moves between the support and resistance levels, but those levels are drawn in the form of trend lines. The crypto asset's price in a channel doesn't move sideways. It moves either in the upward or downward direction, but it moves in between the trend lines. However, trading the channels is almost similar to trading a range but with additional caution. The below infographic will give you a fair idea of how a channel looks like.

In the Binance Coin price chart below, we can see the formation of a channel. If you observe, the price is moving within the range while making higher highs and higher lows.

Formation of a Channel on the Binance Coin Price Chart | Source: BNB/USDT

Bottom Line

Learning to trade the crypto market according to its current market state is what separates professional traders from novice ones. Always make sure to check the overall market trend before placing any trades. In our upcoming lessons, we will explain how to trade each of these market states with clear examples.

Along with that, we will also provide a set of the most recommended indicators for each of these market states for additional confirmation of your trades. So, stay tuned and keep watching the KuCoin Blog for more informative and educational content. All the best!

For anyone to accurately trade cryptos based on their market state, a reliable charting tool is crucial. At KuCoin, you get access to the amazing TradingView premium charts, which will help you in mastering the market state identification and trading.