Climbing the crypto charts: An introduction to ladder trading

Successful crypto traders maximize gains while minimizing risks – and ladder trading is a common way to deal with volatile price swings. Rather than entering or exiting positions at a single “perfect price,” this method involves using a list of incremental orders to spread out buy and sell requests, and it’s used in both traditional and Web3 financial markets.

But just because ladder trading is popular doesn’t mean it’s ideal in every circumstance. In this article, we’ll explain how ladder trading works as well as its benefits and risks.

What’s ladder trading?

Ladder trading involves placing graduated buy or sell orders within a target price range – costs increasing or decreasing at regular intervals, like rungs on a ladder. The goal is to enter or exit crypto positions at favorable average prices, rather than committing to one large (and more risky) order.

Although ladder trading may not result in optimal gains, it helps traders manage risk by tempering the crypto market’s volatility. Buying and selling crypto slowly and carefully gives investors more control over their trades.

What's the difference between price ladders and ladder trading?

When crypto traders analyze price charts, they may use technical analysis tools called price ladders. These tools vertically display the latest details about buy and sell orders at different price levels. Buy orders (aka bids) are positioned below the crypto’s current price, and sell orders (aka asks) are placed above.

Traders will often consult price ladders to view recent activity when planning their ladder trading strategies. But these tools only reveal current market dynamics, while ladder trading is a technique for executing buy and sell orders at predetermined levels.

How does ladder trading work?

Ladder trading requires careful planning and analysis, so you can achieve your goals without taking on more risk than you're comfortable with. Here's how to get started.

Analyze current market trends

First, you’ll review the cryptocurrency’s chart and look for notable patterns and attractive price clusters. Along with viewing current buy/sell activity in price ladder tools, you can use technical analysis methods like moving average trendlines, volume bars, and Fibonacci retracements to get more precise estimates of key levels.

Plan the trade ladder’s orders

After deciding where to place your orders, you’ll have to clearly define where and how much to commit at each target. Establish the total number of orders, the space between them, and how much you want to spend at every price point.

Place orders directly on the market ladder

Each buy or sell request is typically a limit order, which means it executes at a preprogrammed price. For enhanced efficiency, some traders use algorithmically programmed trading bots that can scan for criteria like preferred volatility and make nuanced decisions autonomously.

Manage and adjust orders in real time

Once your ladder goes live, you’ll enter "monitoring mode” as the cryptocurrency’s price trends toward or away from the expected range. Depending on how the currency moves and your preferred time horizon, you might manually step in to cancel unnecessary orders or shift positions.

Exit positions

After the positions in your ladder fill up, it’s time to transition to an exit strategy, either to capture gains or cut losses. You can use one-cancels-the-other orders called stop losses to get out of losing positions, or take-profit orders to sell for gains if your ladder trading was successful.

4 common ladder trading strategies

Ladder trading can take on different forms, depending on the digital asset category or market you're entering.

1. Classic laddering

Sometimes called order laddering, this is the most straightforward tactic, and it involves breaking one order into a few chunks at different price levels. Instead of trying to time the market, order laddering focuses on adapting to volatility and smoothing out average entry and exit prices.

2. Options ladder trading

Unlike trading cryptocurrencies directly on the spot market, derivatives like options contracts bet on future price directions. Ladder strategies that use options typically open multiple positions with different expected prices or expiration dates to adjust for market volatility. Some traders use options ladder trading to exploit price movements, while others use it to reduce the negative impact on pre-existing long-hold crypto positions.

3. Bond laddering

Bond laddering is a fixed-income strategy where an investor buys multiple bonds with different maturity dates to create a ladder of expirations. Once a bond matures, the investor has the liquidity needed to reallocate funds into another bond or investment vehicle.

4. Binary ladder trading

Binary ladder trading is the most advanced and speculative technique – traders buy multiple derivatives at different prices. This lets investors bet on expected price directions while further minimizing risks.

For example, if a trader predicts that Bitcoin (BTC) will cross the $90,100, $90,250, and $90,300 price thresholds within the next hour, they might enter a futures ladder at those levels. If the price rises to $90,100 and $90,250, but it fails to reach $90,300 before expiration, the trader still collects partial gains.

Benefits of ladder trading

Ladder trading can help you achieve sizable gains in volatile markets through:

• Greater efficiency: Because ladder trades are automated, after you set your ladder up your trades will execute quickly.
• Better price averaging: Incremental buys or sells soften the crypto market’s volatility. Although you won’t get the absolute “best” price, you’re likely to get a better cost basis or average sale price than when you commit to a single order.
• Improved risk management: Spreading out orders also means you don't risk your entire position on one price, and it gives you more breathing room during market fluctuations.
• Lower emotional stress: Since ladder trades are planned using technical metrics, you know your decisions are evidence-based rather than driven by emotion. Using a clear, rule-based entry and exit model helps you keep a cool head amidst extreme price swings.

Risks of ladder trading

Even if ladder trading helps to curb price volatility, it doesn’t eliminate risks. The extra protection ladder trading provides can also eat into profitability through:

• Higher fee burdens: Since this strategy relies on multiple orders, it costs more in fees to execute all those positions, which cuts into your potential profits.
• Missed opportunities: If prices move too far and too fast, they could bypass the limit orders on your ladder. Skipping orders means you won’t get in or out of your positions as intended.
• Market volatility and whipshaws: When the crypto market is choppy or range-bound, prices may repeatedly move up and down through ladder levels and trigger multiple automatic trades. Getting caught in these price whipsaws can exacerbate fees without delivering meaningful profits.

Keep crypto trading activity in one place with CoinTracker

There’s no escaping how volatile the crypto market can be, but techniques like ladder trading let you participate cautiously. While you’re still exposed to some risk, ladder trading helps you build up lots of small gains to strengthen your portfolio. Just keep in mind that multiple, frequent orders make it more challenging to track your activities and calculate essential tax information.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.