Trading 101: How to Draw and Trade a Ranging Crypto Market like a Professional?

2021/12/03 10:52:57

The evolution of technology has enabled analysts to read and interpret the financial market. The raw data that is processed into charts in real-time has significantly helped traders and investors study a market asset's price action.

Over the years, the financial charts in all marketplaces, Stock, Forex, Commodities, Cryptos, etc., have proved that prices do not hover randomly in the market. There are certain directions that the market moves and repeats the same pattern over and again. These directions are also referred to as states of the market.

Out of various different states of the market, one of the most frequently occurring states is a range. Alternatively, analysts call it a consolidation phase of the market.

Ranges have mixed reviews among technical analysts. It is certainly a no-go for investors for the relatively lower returns. However, many short-term traders do prefer to trade a ranging market for volatility and opportunities it brings to the table.

Ranging markets are the easiest to identify in all market timeframes. Yet traders take a hit when it comes to interpreting and trading using it. As simple as they look to apply and trade, comprehending them correctly is quite challenging.

What is a Range?

A range is a state of the market where the price action is visually sideways. Unlike a trend, the prices do not dominate in one specific direction but move both sides. The strength from both the parties – bulls and bears does not allow the price to trend in a certain direction.

Ranges typically work based on demand and supply in smaller price differences. In other words, ranges are formed due to the existence of both Support and Resistance that are close to each other.

Comprehending a Range

Visually it is true that ranges are sideways movement in the market, but there is more to it when it comes to interpreting it.

A range is that state of the market, where both buyers and sellers are dominant. There is a certain price level, the bulls are interested to buy the asset, and at a specific price, the bears are willing to sell their assets.

Alternatively, it can be comprehended based on the willingness of a market party to not buy/sell an asset. The range is also a state where the buyers stop paying a higher price than a specified price (Resistance level), and the sellers do not short it for a specific lower price (Support). Since the entire price action happens in a single market, the prices look to be moving sideways.

Technically speaking, in a range, the bulls do not let the bears breach below the Support level, and the bears hold the bulls from breaking above the resistance level. The power comes from both the market players, at the same time, but the trajectory of the price move only between two price levels.

Range Illustration

How to Draw a Range?

Drawing the range correctly is extremely critical in trading a range effectively. And understanding to draw Support and Resistance levels plays an important role, as the entire concept of ranges revolves between these two zones.

When drawing a range, one must make sure to extend the ray at the price level where there have been a majority number of reactions. Note that drawing a horizontal line across the highest and lowest points does not make a range—a correct Support and Resistance level results in a reliable range that works based on the above interpretation.

Considering the below illustration, for example, we see that there are a couple of ways to draw a range for the same market. However, the one drawn on the left is the correct range because the Support and Resistance levels are marked at the correct levels. And the one on the right side stands incorrect because the Support and Resistance level plotted considers the false breakout as well, which essentially must be ignored when drawing the range.

Right way to Draw a Range

Trading Ranges Like A Pro

As mentioned, the crux in trading a range market lies in perfectly plotting the top and bottom of the range. If these levels are drawn correctly with extreme care, then trading a range becomes a child’s play, indeed.

Going by the definition, ranges move between two prices levels – demand level (Support) and supply level (Resistance). The market tends to rise from the Support and drop from the Resistance. And one can trade a range with the same idea – to buy at the demand zone or short at the supply zone. Additionally, to enter much smarter, one can go long/short after the occurrence of the fake-out.

Range Formation on the Ethereum Price Chart on KuCoin | Source: ETH/USDT

To sum up, ranges are one of the most preferred markets states to trade, for the fact that they move quickly and swiftly. The real essence to trade a range effectively lies in drawing the perfect Support and Resistance levels. And to have an added edge in the market, buying/selling after a fake-out confirms the existence of the big players in the area of interest. Stay tuned and watch the KuCoin Blog for more interesting and valuable educational content. All the best!

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