Like many other financial assets, cryptocurrencies follow patterns when price changes occur. When the price moves, it creates ranges and trends, creating highs and lows for a particular period. So, it is no wonder crypto traders seek to apply various trading strategies to generate trade ideas depending on range and trend information. The range breakout strategy is one of the most adaptable trading methods that enables crypto investors to determine precious trading positions.
However, following specific guidelines to generate the most precious trading ideas using a range breakout trading strategy in crypto trading is necessary. In the following section, you will briefly discuss the range breakout strategy to determine the most precious trading positions in crypto trading.
Range Breakout Strategy
Range Breakout Strategy refers to identifying ranges during trends. When the price breaks beyond the range, remarkable profits can be made. A breakout in the current trend’s direction is known as trend resumption, while the opposite is a trend reversal. When the price remains in a range, it usually moves into the consolidation phase, and financial investors usually detect the range by using rectangle shapes with two horizontal lines that act as support and resistance to a specific price range.
When the price usually reaches beyond that level, it usually continues in that breakout direction. More specifically, if the price breaks above the resistance level, it may continue to move upward, whereas any break below the support line indicates the price may continue to drop from that specific range.
Crypto traders must know several types of breakouts to understand the range breakout strategy and its effectiveness.
- Bullish Breakout: Bullish breakout occurs when the price breaks above the range and continues moving beyond the resistance.
- Bearish Breakout: The bearish breakout occurs when the price breaks below the range support and continues to decline.
- Continuation Breakout: Continuation breakout occurs in the direction of the current trend. For example, check the ETHUSDT chart above.
- Reversal Breakout: A reversal breakout occurs when a breakout occurs, the price changes direction, and the trend starts moving on the opposite side of the existing trend.
- Fakeout Or False Breakout: A fakeout occurs when the price breaks beyond the range and returns to the range or the breakout fades.
How To Use Range Breakout Strategy
The range breakout strategy is one of the financial investors’ most widely used trading methods, applicable to many assets, including cryptocurrencies, forex, commodities, stocks, etc. Most of the crypto investors follow specific guidelines when using the range breakout strategy in crypto trading, as follows:
- Determine the range
- Wait till a valid breakout
- Trade participation
Determine The Range
At the initial step, crypto traders detect ranges using a simple support-resistance concept when using the range breakout strategy. Determining range involves connecting highs and lows to detect resistance and support levels.
Wait Till A Valid Breakout
When a range is detected, financial investors wait till the price reaches outside of the range. Then, they place trades according to the breakout direction.
Trade Participation
Making profits using a range breakout strategy depends on placing trades according to the market movement and direction. Smart investors often place orders in the direction of the breakout; in that case, the stop loss level would be at the opposite side of the range. In most cases, the profit target would be more than twice or more than the stop loss target.
Bullish Scenario
When seeking to open buy orders, detect a range of the target asset. When the price enters a range, closely observe the price movement, specifically at the resistance level.
The price breaks above the resistance level, enabling buying opportunities for crypto investors. Place the stop loss below the support level, and the risk ratio should be 1:2-1:3.
Bearish Scenario
When seeking to open sell positions, detect the range on your target asset. Then, wait until the price reaches below the support level. When it does, it will enable selling opportunities for crypto traders.
Place an efficient stop loss above the range’s resistance level. The profit target should be twice or three times the range. In other words, the expectation should be 1:2-1:3 while using this trading method.
Limitations Of Using Range Breakout Strategy
Although the range breakout strategy is among the classic trading methods, it has some limitations or drawbacks. A crypto investor who implements this trading method in live trading must keep these facts in mind to avoid loss and receive maximum profit, such as
- False breakout or fakeout risk
- Correction to the range
- Unrealistic expectation
False breakout or fakeout risk
A false breakout occurs when the price exceeds the range and returns immediately, so the breakout fades. This can be either resistance or support level, as range means a continued battle between bulls and bears. Fakeout often occurs when support resistance is not 100% accurate.
Correction To The Range
Another limitation of the range breakout strategy is that the price often returns to the range before moving further after the breakout occurs. Novice traders often lose money when this retracement occurs, as they may close the trading position due to a lack of confidence and experience. Meanwhile, expert crypto traders know that the price returns to the range before continuing to the breakout direction at least half the time.
Unrealistic Expectation
Another major issue crypto traders face is unrealistic expectations or optimism about the “big move”. The ideal expectation is the price moves as the range (support to resistance), but in most cases, double or sometimes three times move. So, a realistic stop loss and a realistic profit target are essential for this trading method.
Final Thought
Finally, if you understand sufficiently, it is very easy to spot ranges in live charts. It is best to rely on chart patterns, but it is also better to check on fundamentals before opening any trade, as both are responsible for price movements. This article lists all essential factors related to the range breakout strategy. We suggest following the guidelines properly while using this trading method in live trading and practising to master it before applying it to a live chart.
