The term “sideways market,” and “trendless,” are often used interchangeably. If someone refers to a particular market as “trendless,” they are saying the market is trading sideways. A sideways trend consists of horizontal price movement in which the power of supply and demand are at equilibrium. When an uptrend or downtrend is in motion, and prices suddenly trend sideways for a transient period, it is known as “consolidation.”
Consolidation often precedes the continuation of an uptrend or downtrend. If prices are trending sideways, neither demand nor supply is dominant enough to institute an uptrend or downtrend. Many traders also refer to sideways price movement as a “phase of congestion.” Periods of consolidation/congestion often result in prices fluctuating between major support and resistance levels. For this phase to terminate, demand must overpower supply, thereby instituting an uptrend, or, supply must overpower demand, thereby instituting a downtrend.
Figure 1.1 Sideways Market
Figure 1.1 shows a sideways market. Prices are fluctuating between major support & resistance.
Figure 1.2 Sideways Market – Prices Fluctuating Between Major Support/Resistance
Figure 1.2 shows the same sideways market from figure 1.1. However, major support and resistance are identified.
Figure 1.3 Sideways Market – Prices Fluctuating Between Upper and Lower Bollinger Band
Figure 1.3 shows sideways price movement fluctuating between the upper and lower Bollinger Band.
Figure 1.4 Trendless Market
Figure 1.4 shows a trendless (Sideways) market.
Contrary to popular belief: a sideways market is certainly tradeable. It’s best to avoid opening positions near the middle of the price range. Instead, opening positions near major support/resistance offers a lower-risk opportunity and allows us to maximize profits if prices fail to validly penetrate either level (prices retest the opposing level).
Why is this lower-risk?
If prices validly penetrate the level (support/resistance) you opened a position at: close for a quick and relatively small loss. If prices bounce form the level, supply and demand exchange control, you can maximize profitability by closing on the opposing end of the range.
It’s virtually impossible to forecast whether prices are going to increase or decrease when congested near the middle of the range. If you’re wrong, prices move against your position to test the opposing support/resistance level, you might be faced with a hefty loss. Again, opening positions at the ends of the range diminishes the chance of substantial loss, let alone losing at all.
An oscillator such as stochastic or W%R supplements a range-bound market (sideways) trading system. These two oscillators compare the closing price of the current session against the high-low range of the previous 14 sessions. Quick signals serve as a result and accuracy typically improves – positions are opened when prices ACTUALLY bounce from the level. This is advantageous for options buyers. You might get in a slightly worse price, but you’re getting in the counter level move when it’s actually happening. Theta can kick rocks.
Now, sideways markets are difficult to trade when not consistently testing major support/resistance. This means volatility is diminishing and the immediate range narrowing. It’s very difficult to forecast where prices will halt and perform a counter move when this is happening. Thankfully, Bollinger Bands are immensely advantageous; prices tend to fluctuate between the upper and lower band when they are NOT consistently testing the major support/resistance level.
Technical analysis truly thrives in a sideways market. Everyone’s making money when the market’s just going up up and away, but profiting in a sideways market is a different beast.
Having a good understanding of rudimentary TA methods is sufficient.
Oh, and last but not least.
DON’T USE THE FIBONACCI RETRACEMENT TOOL IN A SIDEWAYS MARKET!!!!!
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