What Is Trading in a Sideways Market? 3 Tips and Strategies

If you’re new to the world of trading, sideways markets may throw you for a loop. Not every asset will exhibit the same trends as a bullish or bearish market, and this can make it harder for investors to develop a reliable investment strategy. But that doesn’t make it impossible. Here are three tips and strategies for trading in a sideways market.

What Is a Sideways Market?

A sideways market is the opposite of a trending market. A sideways market occurs when an asset’s price changes without developing any bullish or bearish trends. 

Instead, the price of stocks and securities will move up and down but not in any predictable pattern. This is also known as sideways drift and can last as long as several years.

How to Identify a Sideways Market

Investors can identify a sideways market by looking at the Average Directional Movement Index (ADX). An ADX above 25 indicates a strong trend, though the ADX does not by itself indicate whether this trend is up or down. An ADX score below 25 indicates that no trend is present, and a sideways market is especially indicated when the ADX falls below 20.

Tips for Trading a Sideways Market

When it comes to trading, sideways markets can present unique risks and challenges. Here are some of the most common trading strategies to use in a sideways market.

1. Determine Whether the Sideways Market Is Worth Trading

First, determine whether you’re truly facing a sideways market by looking at the ADX. If the ADX is below 20 but has recently increased, it may indicate that a trend is developing. You’ll want to decide whether the asset’s current price is worth the risk or whether you’d prefer to wait to see what trends may develop before committing to investing.

2. Incorporate Trading Strategies

If you commit to trading in a sideways market, you’ll need the right trading strategies. Here are a few of the most common.

Anticipate Breakouts

Typically, a sideways market fluctuates between areas of support and resistance, representing the range in which the price can change. A breakout occurs when the price falls outside this range. For example, you might predict that the price will drop below the support level, giving you a chance to buy shares of an undervalued stock.

Trade Inside the Ranges

In a sideways market, trade within the range. That is, avoid holding onto securities that drop below the support threshold or buying assets that exceed the resistance level. 

A stop-loss order, for example, can automatically jettison an asset whose price falls below a specific threshold. Investors can use this order type to minimize their losses if the price should drop.

Gain Trading Edges

What are trading edges? A trading edge refers to a strategic advantage over other investors. The most common trading edges are information edges and price edges. 

For example, an investor might read industry publications to learn more about how a company is tapping into a new market. This provides an edge over other investors who don’t perform this diligent research.

Identify Trade Range Breakouts 

Trade range breakouts occur when an asset’s price breaks out of its previous range. Identifying when this happens is crucial for short-term traders. 

For example, if you monitor a company’s stock price and pinpoint a time when it breaks out of its normal range, you can potentially earn large profits if it breaks out above its usual resistance level.

Prepare for Price Spikes

Day trading strategies often depend on rapid price fluctuations. Price spikes, for example, can represent an opportunity to potentially make money on an asset already in your portfolio. This demands close monitoring of the company’s share price, but those who identify these price spikes may be in a position to earn profits from a short position Keep in mind of the risks involved with short selling. There is no limit on how high a stock price could rise so the potential loss is unlimited. This type of strategy is not appropriate for all investors. 

3. Never Test the Depth of Water with Both Feet

Of course, if you’re new to trading, sideways markets may be intimidating. And that’s OK. Many beginner investors would do well to first focus on a well-balanced, diversified portfolio and then consider individual stocks only when they become more comfortable with the tools and terminology of advanced stock trading. 

Above all else, never invest money you can’t afford to lose, especially because sideways markets display so much volatility.

Potential Advantages of Trading a Sideways Market

Despite the relative risk, sideways markets may offer traders some distinct advantages, including:

• A defined range creates clear entry and exit points.
• Short-term trades are generally less impacted by broader economic trends.
• Sideways market trading requires investors to exercise more control.

These advantages make sideways market trading a common practice among day traders, swing traders or those who hold short positions.

Things to Remember

All forms of investing carry some level of risk, and there can be additional risks associated with sideways markets. Here are some things to remember before considering this form of stock trading:

• Transaction costs can add up quickly when you are frequently trading.
• Monitoring prices and changes demands time and attention.
• Long-term investors may not benefit from these trading strategies.

With that said, traders who approach a sideways market with a clear understanding of the challenges can better manage the risks of trading this strategy and potentially do well. 

The Need for an Investment Platform

Trading in a sideways market has its challenges, but it has its positives as well. It also demands having the right tools and resources on your side. The right investment platform can give you access to actionable data to help give you an edge, even when the market goes sideways.

Frequently Asked Questions