Range Life: Keeping Trading Simple

June 7, 2019 / by Noah Hornaday

Silicon Valley titan Tim Ferris has a question he asks when tackling complicated tasks: “If this was easy, how would it look?”

When we ask this question about trading, longing (buying) at support and shorting (selling) at resistance would be as good a response as any. Oftentimes when prices are beaten down into the accumulation phase of the market cycle, these support and resistance levels create what is known as a trading range. Price bounces repeatedly up and off of support and then back down from resistance in a dynamic equilibrium while big players build a position in anticipation of the looming bull run.

Constructing the Range

These accumulation trading ranges typically form off the first big relief bounce after the downside, which typically also breaks down trending diagonal resistance. The location of the bounce creates the range low, and then the pivot point of where the bounce goes on to be rejected forms the range high (Figure 1).

Figure 1

From there we can then identify what is considered the range EQ (equilibrium) using our Fibonacci set drawing tool on TradingView. This will be seen as the 0.5 level in the Fibonacci set. The range EQ often acts as a pivot itself whilst price bounces between the range high and low. When the price is above the EQ, we expect further upside and a breakout for the bulls, whereas the opposite is true when price is trading below the range EQ.

Figure 2

There are times, however, when the range does not concretely contain price, and price temporarily pops out of the trading range only to pop back in later. These occurrences are known as range deviations. Although the range was broken, once price is back inside of the range, price goes on to respect the range low EQ and high just as it did before (Figure 3).

Figure 3

How to Profit Using the Trading Range

The beauty of a trading range is the clear cut trading parameters it offers in terms of entries, exits and stop losses. When looking to buy a range-bound asset, there are two options.

The option that offers the most upside (option 1 in Figure 4) is waiting for price to revisit the range low with preset orders placed at that level. The stop loss, once the orders are filled, would be placed below the range low, meaning the trading thesis would be invalidated should price begin trading outside of the range. The target would be the range high.

The second option (option 2 in Figure 4) would be waiting for price to confirm a bullish trend and break out of the range and over the range high. One can either place orders to buy the breakout or wait for a confirmation (and not a fakeout) of the range high breakout and buy the retest of the range high. The trading thesis here is that the previous range high resistance will now act as support. For option 2, you would set your stop loss below the range high, targeting the next obvious level of horizontal resistance.

Figure 4

That’s it. No need to overcomplicate it. Trading truly can be that simple. There are many altcoins whose charts have looked similar to the chart used in this example in recent weeks and months. By using the trading range to clearly map out your stop losses, entries, and exits, you can easily maximize BTC gains before the bull run fully kicks into gear — no fancy indicators or algorithms needed.