A sideways market, sideways drift or sideways trend, is the term used to describe the phenomenon that takes place when the price of a stock, commodity or security fluctuates between a fixed support and resistance for an extended period of time. In its simplest terms, a price range is established for the security, one that it fluctuates within but cannot break out of. In this article we will delve deeper into the concept of a sideways market as well as explore some other aspects such as the trade sideways meaning as well the sideways market strategies. In order to do that however, we first have to establish some basics.
Support and Resistances.
Support and resistances are the two primary pillars of a sideways market. Given that a sideways market exists within certain upper and lower circuits. These circuits are known as supports and resistances. A support is the lower price level that stock price bounces back up from. Similarly a resistance is a price limit from which the price of a stock begins its descent. A sideways market exists in this realm as the prices bounces around between the support and resistance.
A sideways market.
What is sideways market?
The sideways market occurs when the price of a stock or security stays within a given range (between the support and resistance) for a long period of time, arriving at somewhat of a horizontal line on the graph if you were to, for example, chart a 200 day moving average for instance. A sideways market is considered the opposite of a trending market. In a trending market, the price moves in a given direction, either upwards or on a decline, without a fixed support and resistance. In this scenario, the price develops smaller supports and resistances for shorter periods of time that it breaks out of to continue the trend.
In a market that is trending sideways, the quantity traded is also affected. Given that the price is not moving in any given direction, there exist an equal number of bulls and bears that are trading the commodity, rendering its quantity traded to also remain relatively unchanged.
Trading in a sideways market.
Traditional trading strategies generally do not apply to a sideways market. As a result, traders have developed specific sideways market strategies to trade sideways.
1. The prime ‘move’ for an investor to make in a sideways market is to enter and trade sideways, expecting a breakout in the price trend. While this might result in strong returns, one must always be weary of depending on a breakout to attain returns, as even the most technically equipped trader cannot accurately predict a breakout 100% of the time.
2. A more stable edition of sideways market strategies therefore, is to apply a range bound strategy with a target risk to reward ratio of 2:1.
3. Additionally, if the price for a sideways market is expected to remain that way for a longer period of time, traders can make an earning by placing the appropriate call and put options based on the support and resistance.
4. Another effective sideways trading strategy sees traders placing stop losses just below the support level in order to protect themselves against losses if there is a downward breakout in the price.
The Benefits and Drawbacks
There are a number of benefits that come with trading sideways.
1. Traders are able to make clear entries and exits while relying on little to no speculation due to the support and resistances. In a sideways trading strategy, the support and resistance can be interpreted as signs to entry and exit. Since the trader knows the highest and lowest possible price, he can enter the market when the price hits the support level and look to sell when the price hits the resistance ceiling.
2. Additionally, trading in a sideways market means traders are entering and exiting the market quicker, causing the possibility of their position being hurt by something like a company announcement to drop to a minimum.
On the other hand, trading in a sideways market is extremely time consuming because of the increased frequency of trades. Additionally, this increase in trades also causes an increase in transaction fees.
The sideways market can be a lucrative investment opportunity for investors if they are able to correctly identify a sideways trend as well as develop and implement a sideways trading strategy. Given that the highs and lows are given to the trader by the sideways trending price chart, they can successfully enter on a low and exit on a high with the right maneuvers.