Disclaimer: This is not financial advice and I am not a financial advisor. This article is for divertissement purpose only. Trade at your own risk.
Thank you for reading this article. I have been a lot more successful at trading ranges recently (ironic, since we’re in a trending market) and wanted to share my findings with you.
I. Range Definition
Ranges are characterised by price action rotating back and forth between a low boundary (support) and a high boundary (resistance).
The underlying cause behind ranges is that buyers and sellers agree that the fair value of an asset is defined within the range: therefore, the market is in balance.
II. Identifying Ranges
Besides the necessary presence of a resistance and a support, we can also look for a Point of Control (POC) within the range. The POC is often located near the middle where we frequently see price interacting.
It’s essentially the level where the most trading volume was executed and is usually close to the level where price spent the most time. Considering the market’s objective to facilitate trade, it is important to understand that it is in balance when a high volume is traded at a specific level. These high-volume areas always have a slowing-down effect on price and this is why they go hand in hand with ranges, as opposed to low-volume areas that are associated with bullish or bearish moves.
FIGURE 1 — RUNE/USDT, 1D, BINANCE
The above example is a range defined with a resistance, support and a Point Of Control (in red). As we can see, the POC is located quite in the middle of the range with the high trading volume area being highlighted by the Volume Profile Visible Range (VPVR) on the right side of the screen. The VPVR is just a representation of the volume traded at each price level for the visible range displayed on the screen. Again, a high volume area represented on the VPVR means that the market is in balance, with the POC being the highest volume node within the value area.
III. Liquidity Structure of Ranges
In terms of order types present below support, we have:
- Limit-buy orders from buyers;
- Limit-buy orders from trapped shorts wanting to exit at breakeven;
- Long positions stop-loss orders to place (after hitting a certain price level):
- Limit-sell orders;
- Market-sell orders.
4. In case of support breakdown, some traders set sell-stops-below orders to place limit or market-sell orders after hitting a certain price level.
Note that in the last two cases, stop-market-sell orders can act as fuel to sustain a move down further, which is why we sometimes see long wicks downwards.
In order for price to revert after reaching a support area, we need:
- Market-sell orders absorption by limit-buy orders (1) & (2) and/or;
- Market-sell orders exhaustion.
Combined with market buyers stepping in, the price is able to move upwards.
The same logic can be applied to resistance levels: not only short position traders will place their stops (conditional market or limit-buy orders) above resistance, but breakout traders will set buy-stops-above orders to place limit or market buy orders, expecting for price to push higher.
Obviously, we’ll also find resting orders from sellers and trapped longs.
Remark: High-volume areas are liquid (i.e. thick order book) and low-volume areas are illiquid (i.e. thin order book). Liquid levels facilitate high volumes of trade without significantly affecting price.
IV. Trading Ranges
There are a few ways to trade ranges:
A. Buy support / short resistance;
B. Buy breakouts / short breakdowns;
C. Buy reclaims of support or POC / Short retests of resistance or POC;
D. Buy support retest after breakout / Short resistance retest after breakdown.
FIGURE 2 — BUY & SHORT OPPORTUNITIES — RANGE TRADING
Not all of these setups are created equal and some are definitely riskier than other. Therefore, it’s always important to pay attention to context (e.g. a POC retest early in the range establishment is most likely riskier than the same setup later down the road after a liquidity run).
In any case, if choosing to use a market order, wait to see a reaction on the chosen level before entering. Especially if there was an excess in price (wick or candles outside of the range), wait for the next candle to close within the range to enter.
V. Trading Ranges — Examples
FIGURE 3 — YFI/USDT, 1D, BINANCE
While this is all easy to see in hindsight, the above figure highlights classic market behaviour in a ranging environment. Liquidity runs are in essence moves that take out previous highs or lows within the range to tap into resting liquidity (order book limit orders from buyers/sellers and trapped traders).
The X marks are levels taken out by liquidity runs. Note that the three highs eventually get taken out by the breakout outside the range.
I got interested in trading this range quite late down the road after most of it had unfolded, which made the big picture a lot clearer.
FIGURE 4 — YFI/USDT, 1D, BINANCE
My entry was located on the candle following the significant reaction from the support reclaim. A low time frame level (at 22,7685.06, in green) broke and led me to place a buy-limit order hoping for a retest of that level.
The stop was placed below the low of the breakout candle and the target was defined as the top of the range for a 2.86R trade. The stop could have been placed at the bottom of the range for a higher R but it’s necessary to be cautious in case there is some kind of over-under pattern unfolding.
By placing the stop below the candle that broke LTF market structure, I had 3 levels of protection (1. LTF resistance turned support in green; 2. The support of the range; 3. The low of the breakout candle).
The take-profit target is also debatable as an extra 44% could have been made on top of the 31% secured. In retrospect, I could have just sold 50% of my position at the top of the range and let the remaining 50% run. For example, by using tools such as Fibonacci Retracements, I could have looked for a 1:1 move (use from the bottom to the top of the range and look for the level at “-1”: sell order would have actually been filled).
Besides breaking the 22,785 level, three other important factors led me to enter the trade:
- Support reclaim right before breaking out the 22,785 level;
- Reclaim of the POC (red line) after breaking out the 22,785 level;
- Other tokens with similar setups had broke out of their range and $YFI was lagging.
I was therefore quite confident in the setup, triggers and defined risk.
Seeing reaction from key levels is also essential, which is why I did not enter the trade after the support reclaim, even though the liquidity run right before was a good indication that price would go higher.
VI. Trading Range Breakouts/Breakdowns
Once price breaks out of a range there are a few ways to enter a trade:
- Buy/sell after the breakout/breakdown candle closes outside of the range: I feel uneasy doing this as it’s often done under the impulse of fear of missing out. However, bear in mind that this can be extremely powerful in higher timeframe trending markets;
- Buy/sell retest of the range support/resistance (prefer rounded retests than V-shape retests): this is the better option in order to define risk properly. However, in strongly trending markets, we may not get that re-test at all and limit orders will not be filled. Therefore, we’re left with stacking orders onto the next supply/demand zone.
FIGURE 5 — RUNE/USDT, 1D, BINANCE
In the example above, there are actually not that many possible entries. In hindsight, we could have entered at the very first support retest before (1), but it wasn’t even an established range then.
We could have reasonably enter in (1) and target the high of the range. By only considering the POC retest, it would have been hard to act on that alone as a reaction from it, which happened soon enough, was needed. Finally, should we have bought that candle reaction from the POC, we would have done so right under the range resistance level, which is not recommended.
Therefore the second opportunity was to buy after the close of the breakout candle as in (2), and put a stop below support. However, this type of stop placement does not protect a trader well in case of proper retest that would wick through the level, leading to getting stopped out.
What I did was placing the stop below the breakout candle low and to be perfectly honest, this did not feel like great risk management as the stop was 22% below entry.
A preferred way to enter would have been to stack orders in the demand zone in (3) and hope for a fill, which eventually happened.
$RUNE is now up 215% so it definitely served me well to enter, but in retrospect I would have done it differently.
VII. Conclusion
Trading ranges can seem easy when the analysis is limited to buy support and sell resistance. In reality, the trader must understand the deeper mechanisms of the market (resting liquidity presence, effect of POC and low volume nodes on price action) to avoid getting trapped on the wrong side of the trade. In addition, it is crucial to properly define risk each time before entering a trade as well as avoiding fear of missing out when price breaks out of the range. By acknowledging that the market will always generate more opportunities to get in, a trader can avoid these common psychological pitfalls.
For more content please follow my account on Twitter: @CryptoNemissa.
References
It is now time to credit better traders that I’ve been following along the years and from whom I learned several concepts highlighted in this article.
@CryptoCred: Excellent trader & content. Most risk management concepts I learned are from his Technical Analysis Series (Risk:Reward Ratio, Stop Placement, etc.).
@Bitdealer_: Excellent video series on YouTube about Supply & Demand and great setups such as Range Low Sweep or Blow-Off Top Short.
@abetrade: Learned a lot about Supply & Demand and Order Flow trading from Adam, through his website Trading Riot.
@George1Trader: Very clear content when it comes to explaining and highlighting high & low sweeps within a range.
@SalsaTekila: A day trading machine from whom I learned a “range within range” concept in one of his older video. It’s essentially a smaller range washing out a key level (support, resistance or POC) with a breakout constituting an entry trigger.
