Trends vs Ranges

Ranges are areas of congestion where price does not trend in either direction for very long before reversing. A range involves an area of resistance (supply) above price, and an area of support (demand) below price. Check out article on Support & Resistance if you need more context.

Quick refresh; When we draw support and resistance levels on the chart, we look for areas where the bulk of the candles stopped, rather than at extreme prices. Extreme points (large wicks) represent panic and forced liquidations. The edge of the range is where enough traders have changed their minds to reverse the prevailing direction of price.

There are various estimates as to how long price either trends or ranges, but most seem to agree that price only trends for maybe 15-30% of the time, and ranges for the rest.

What this means is that traders (should) bet on price reversing (staying range-bound) more often than breaking out, and that a lot of attempts to breakout fail. A lot of amateur and inexperienced traders get excitable at range highs and attempt to buy the breakout. These late longs inevitably get liquidated - becoming market sells. This often provides the fuel to send price back to range lows.

When executing trades around range boundaries then, you may wait to see a swing failure or deviation above the range highs/lows, and then fade the breakout. If price spends a significant amount of time slowly grinding against the top or bottom of the range, this is indicative of overhead supply being bought up, or demand being overwhelmed by sellers - and tells us that price is being accepted at those levels rather than rejected. It would be wise to exit a short if you see price slowly grind into the top of a range.

Transitioning between Trends and Ranges

How do we know when a trend stops and a range starts?

Your first identifier is going to be market structure (swing points). Long wicks often get filled, becoming one of your range boundary's. Another effective way is to look at some orderflow tools - is price failing to go up despite people buying? You may be able to use a divergence between price and cumulative volume delta to judge.

Watching flows in the spot market may also give you an idea as to whether a breakout is 'healthy' or whether it lacks follow-through. This can be a sign of a deviation in the making.

Using ranges for context

Depending on your trading style, you might not only use eyeballed areas of consolidation on the chart; you can use monthly, weekly, or daily levels etc. You may hear of traders marking out the previous weeks range, or Mondays High and Low. You might've seen 'MH' or 'ML' on a chart and not known what it meant. There reason this is done is to provide context.

Every new week on the Monday, I will mark out the previous weeks range.

The following day, on Tuesday, I will then also add yesterday's (Monday's) range to the chart.

Mondays range

A lot of traders don't like to hold positions over night, and even less so over the weekend. Many of your favourite Twitter traders will tell you, "That's me done for the week. Out of all positions. Flat for the weekend," etc.

Also, traditional markets close over the weekend, so whereas during a weekday information can be acted on then and there, over the weekend there's a build-up of information waiting to be translated into price.

Monday's range then not only welcomes traders back into the market, but contains with it 2 days rather than 1 of assimilated information. If the market is to trend up or down then, it must break out of Monday's range later in the week. Often you will see Mondays high get taken, only for price to reject and be re-accepted back within the range. This is just another form of deviation, and a great short signal as price will often migrate back to the other side of the range. If price were to break above Monday's high and remain there for a decent amount of time, you are more likely to bet on continuation.