Crypto trading FAQ: trading ranges and how to trade with them?
The notion of a trading range applies to a time period on the market when the price of the basic asset is in the so-called "horizontal zone". We all know the concepts of "uptrend" and "downtrend," they are pieces of time when the value of the basic asset is going up or down. It is easy to track the mood of the market with them: if the price increases - people buy, if it falls - then sell, it is simple. And during the trading range, the market is in some kind of meditation.
There are several problems here: firstly, the market stays like this for quite long time (especially during the correction), and secondly, not so much information we have about this concept in technical analysis. Typically, the position of many traders is to advice not to trade in such periods. For beginners, this is probably a good advice. No need to go into the maze at once, you don't drive for the first time on a high-speed motorway, right? But if you are already a little skilled in "trading on a short distances" and you want to go on a "long-distance drive", then let's examine several modern methodologies that allows the trader to receive his profit within the range and react correctly to the price of the asset over the channel line.
Trading range or trading channel
In simple words, the trading ranges are movements of the price of assets on the chart in certain corridor, so called "channel". For example, Bitcoin recently was in the corridor of $8,200 - $8,500 and its price did not go beyond this corridor these days. The lowest point is called the "support line", because it supports the asset's rate, so that it doesn't roll down even lower. And the upper one is called the "resistance line", as it seems to resist the price breaking the top of the channel. Each channel has its own "trading range".
Characteristics of the channel
So, the range of the asset price fluctuation is defined and delineated by clear points: there is "stop-loss" at the bottom, "take profit" at the top. A trading channel is created by means of the asset price. Two parallel lines of the current trend between support and resistance are drawn. At the top of the trend the maximum price or the closing of the position are connected. At the bottom - the minimum price or the closing position, respectively. The area inside is a channel where the price will fluctuate for a certain time. Trading inside the channel demand attention, because a break of the channel can happen anytime and in any direction. If the price breaks up, then the market will become "bullish", if down, then "bearish".
Example of a trading channel
Theoretically, everything is simple: when the price approaches the resistance line, traders sell the asset, and when it falls to the support line they buy. It is very important to use such instruments as Stop Loss and Take Profit to hedge against sudden jumps in the market, which are normal for cryptocurrencies. Trading inside the channel is very common in Forex. Moreover, many successful traders consider trading within the channel to be a stable instrument, but it doesn't work on all markets.
Trading inside the channel is good only for short- or medium-term trading, similar strategies don’t work in the long-term trade. Trading ranges are best used on the market with an average volatility. The cryptocurrency market is still very volatile, therefore, trading inside the channel is dangerous and is only intended for professionals. The thing is that the beginner simply can't see the channel correctly.
Variations of trade channels
There are a lot of trading channels types, for example, horizontal or side, we will not write about all of them. For each stage of the market there are different channels. These channels don’t necessarily have to indicate the fact of a global market turnover. They may indicate that the market is at resting or in the consolidation stage. Often this takes place just before the next global movement of the market. Usually, the price break happens in the direction of the previous trend.
How to recognise the trading range/channel correctly?
In order to determine the horizontal channel, it is necessary to draw a direct trend line, which refers to the earliest price maximum, and the second line, which refers to the lower level of the asset price for the same time interval. In fact, there is no definite universal formula, how everything is calculated properly and for how many equal time intervals the price should reach certain values within the channel. But often traders are looking for at least two upper points and two lower ones.
At the same time, the global market trend is not important, the most important thing is clear parallel lines; if you draw lines at the wrong angle, it will give false information.
Answering the question: "What about beginners in crypto trading?" We have an answer: "You need to either stop being a beginner or stop trading." Seriously, the market has already devoured a lot of amateur traders, who made lots of mistakes for maximum profit. To succeed in crypto trading, you need to constantly evolve and learn new strategies.
To sum up
Trading inside the channel is quite common in traditional currency markets and is successfully used by traders on more or less stable assets. The cryptocurrency market is still too volatile, so this kind of trading is only for people who understand the market perfectly and have some experience. The algorithm of actions in the theory is simple: I saw the channel, outlined trading range, bought at the bottom, fixed at the top and waiting for the decrease to the bottom. If there is a break in the trading range, you must use Stop Loss and Take Profit to exit the position in time. To succeed in crypto trading, you must always develop, because this is the most dynamic market in history, where tools and strategies can become outdated and become out of business in less than a day.