Both bull and bear markets are excellent trading environments, but range-bound markets, with modest price activity, are not often considered as thrilling. But what exactly are range-bound markets. Let’s try and understand if there are ways to trade such markets.
Investors use a range of trading tactics to profit at various stages of a market cycle. Both bull and bear markets are excellent trading environments, but range-bound markets, with modest price activity, are not often considered as thrilling. But what exactly are range-bound markets. Let’s try and understand if there are ways to trade such markets.
The price action of any asset, including cryptocurrencies, is typically based on market cycles. Bull markets are identified by periods of growth, where the price generally moves upwards on the back of capital influxes. On the other hand, bear markets are characterized by lower prices and sluggish growth, during which capital investments dry up. These cycles, however, do not occur one after the other. In most cases, they are separated by periods of stagnant prices and low volatility, during which an asset moves between two fixed price points for prolonged periods. This is when a market is said to be range-bound, or sideways. Let us understand this with an example.
The year 2022 is widely regarded as a bear market for Bitcoin, and by extension, the cryptocurrency sector. Bitcoin’s price experienced many flash crashes throughout the course of the year, before stabilizing in late December. Following this, Bitcoin traded in a narrow range – between $16,000 and $17,000 for nearly a month before rising to $21,247 in mid-January 2023. The period when Bitcoin’s price was locked in a 1,000-point price range between $16,000 and $17,000 is an ideal example of a range-bound market.
As the name suggests, a range-bound market is when an asset trades within a narrow ‘range’. They are periods in which the demand and supply are nearly equal and neither bulls nor the bears are able to take absolute control over the market. Meanwhile, prices oscillate mainly between similar highs, also called resistances, and similar lows, also known as supports.
The lack of sharp price movement can limit investors’ potential to make huge money or increase losses if one makes risky plays. This doesn’t mean there are no ways to trade such range-bound markets. Let’s look at a few strategies that can help play the restricted price volatility.
Identify a range-bound market
The first step to trade a range-bound market is to identify one accurately. Some of the tools widely used in the equity markets can come in handy even in the case of cryptocurrencies. Technical analysis tools such as the Average Directional Index (ADX) and the Bollinger Bands can be used to gauge whether a crypto market is trading sideways. The ADX, which measures the strength of a trend, indicates a range-bound market when the reading is below 25. Meanwhile, the Bollinger Bands indicate the same when the bands are narrow, indicating low price volatility.
Buy at support, sell at resistance
This is also among the common strategies that traders use to trade range-bound equity markets. In this, traders place a buy order once an asset trades at its support and a sell order when an asset trades at its resistance level.
For instance, suppose Bitcoin’s price has been unable to cross above $50,000 during a month despite multiple attempts to do so. At the same time, its price also refuses to drop below $48,000. A trader looks at this movement and with the help of technical tools draws an assumption that the price is likely to fall after hitting $50,000 (resistance) and likely to rise after hitting $48,000 (support). They then proceed to buy Bitcoin at $48,000 and sell Bitcoin at $50,000, making a profit of $2,000. This can be repeated several times during a range-bound market to maximize profits.
Volume
Ranges do not last forever and there are several signs that suggest that a trend change is incoming. One of the biggest signs to look out for is volumes. If the price of an asset breaks above its resistance and below its support with strong trading volumes, also called breakouts, there is a greater chance of the price continuing in the direction of its breakout.
High volumes are an indication that either bulls or bears are gaining more control over one another and are likely to dictate the price going forward. An asset’s price is likely to continue upward momentum once its price breaks above resistance with strong trading volumes. Similarly, an asset is likely to witness continuous selling pressure if its price breaks below the support level accompanied by high volumes. Investors can use this knowledge to buy or sell assets based on future price direction. As an article by Bybit suggests, traders can use technical indicators such as pivot points to map out horizontal support and resistance levels on a price chart.
Conclusion
A rangebound market is an ideal trading bet only for those traders who do not intend to predict the market direction but rather use the price movement within a narrow band to their advantage. It can also prove beneficial for traders with limited risk appetite. As is the case with Bitcoin that has largely traded in a range during the last six days. If this trend continues, traders can use various technical analysis tools and make the most of this sideways market. However, it is always advisable to research well before undertaking any kind of trade, whether in equity or the crypto market.