Trading Sideways: Definition, Identify, Strategies
Most studies show that it’s more important to have the right asset allocation than to try and correctly time the market. When the market is drifting sideways, it’s a great time to rebalance your allocation.
Strategies for trading a sideways market
For instance, you could sell a straddle—both an at-the-money call and a put option for the same underlying asset in the same strike and same expiration month. As the options’ expiration date approaches, the option premiums are eroded by time decay—and ultimately if the market remains sideways will decay to zero. A sideways market, or sideways drift, occurs when the price of a security trades within a fairly stable range without forming any distinct trends over some period of time.
Buy-and-hold investors
It is not uncommon to see a horizontal trend dominate the price action of a specific asset for a prolonged period before starting a new trend higher or lower. If the range of the sideways price movement is large enough, some short-term traders would trade the price swings from the boundaries of the range. They try to go long from the lower boundary (support level) and exit just before the upper boundary (resistance level). When possible, they try to short from the upper boundary and exit before the lower boundary.
A sideways market also occurred at the end of the contraction phase of the cycle in 2011 when gold prices hit $2,000 an ounce. They were worried about Congressional threats of a debt ceiling crisis and potential debt default. Once fears subsided and the bull market in gold was over, the commodity traded sideways throughout 2012. As the economy continued to improve, gold prices entered a bear market in 2013. Prices continued falling in 2014 before the upward climb that began in September 2018.
If the sideways drift is expected to remain for an extended period, investors can profit by selling call and put options with approaching expiration dates. One clue is to consider the general economic situation to have an idea of the phase of the business cycle. A market consolidation during a transition of the business cycle may signal the next phase of the business cycle and a reversal in market direction. The first thing to do is to find out the levels of support and resistance. A support level is the price level where buyers come back in to buy the asset — they don’t let the price fall below that level. A resistance level, on the other hand, is where buyers sell the investment because they don’t believe it will go much higher.
Example of a Sideways Trend
The market moves sideways when the price oscillates between these boundaries. It may represent consolidation what is a bear market and how does it impact you before the continuation of a prior trend or the emergence of a new trend. Many traders are well equipped with the knowledge and skill sets to identify signals in the market that may indicate a stock’s uptrend or downtrend.
The second leg of the trade involved selling a $40 put on the same stock at the same expiration for $2.5 in premium. In this situation the trader has received a total of $5 in premium and will make money if the underlying stock price stays within a range of $35 to $45. The profit Best copper stocks will never exceed the total premium the trader received; however, it allows the trader to make money in a sideways market. Also known as sideways drift, it occurs in a horizontal channelized zone.
When the price is in the middle of the trend line, remain neutral. Horizontal channels provide a clear and systematic way to trade by providing buy and sell points. Investopedia does not provide tax, investment, or financial services and advice.
What Is a Sideways Market / Sideways Drift?
Buying and selling pressure is equal, and the prevailing direction of price action is sideways. Short-term traders can navigate a sideways market by employing specific strategies. They may sell call and put options with approaching expiration dates, especially if the sideways drift is expected to persist. Savvy investors recognize opportunities to enter trades in anticipation of a new trend.
- In this case, the trader sells a call option with a strike price of $40 and gets paid $2.5 in premium.
- If the range of the sideways price movement is large enough, some short-term traders would trade the price swings from the boundaries of the range.
- Many traders are well equipped with the knowledge and skill sets to identify signals in the market that may indicate a stock’s uptrend or downtrend.
- Price is framed out in a trading range by the pivot highs (resistance) and pivot lows (support).
- To know how to trade a sideways market, or even determine whether to trade it or stay away from the market, you need to be able to identify it first.
To know how to trade a sideways market, or even determine whether to trade it or stay away from the market, you need to be able to identify it first. Here are the things to look out for if you want to identify a sideways market. The chart below depicts a sideways trend, following a strong downtrend, that has lasted several months. The best way to make money in a sideways market is to be diversified. That way, you won’t lose too much or gain too much when the market breaks out. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
That’s also called a « range-bound market. » It may occasionally rise above or below those levels, but it doesn’t follow through with an even higher high or lower low. Eventually, the price would break out and follows that up with an even higher high or lower low, bring an end to the sideways market and marking the beginning of a new bull or bear market. However, there can be many false breakouts before a genuine one eventually occurs. Sideways markets can also be referred to as range-bound markets, ranging markets, non-trending markets, or trendless markets. In that situation, instead of price trending up or down, price simply oscillates in a horizontal range or channel, with neither the bulls nor bears able to gain control.
A sideways market means prices are getting ready to continue forward in the same direction they had been in before. It’s unlikely that a sideways market will occur before a significant change in direction. Well, as with every phase in the market, a sideways market is neither good nor bad; it all depends on how you approach it. As the price continues to move within those two levels, there may come a time when it would break out of one of the boundaries, but it may not follow through with an even higher high or lower low.
They are clear to use and provide a systematic approach to trading, typically occurring in times of price consolidation. Understanding the support and resistance level is also important to identify a sideways market. In contrast, resistance is the upper How to recover from stock loss price that resists its position and falls.
A sideways trend is characterized by a lack of significant upward or downward movement. Instead, prices tend to trade within a specific range, with neither bullish nor bearish sentiment dominating the market. During this phase, an asset’s price might bounce between a defined support level, where demand for the asset increases, and a resistance level, where supply becomes more prominent. A sideways market, or horizontal trend, is a market phase where price rises and falls within a particular range. The sideways trend occurs as a result of the equal demand and supply forces in the market for a specific time.
