Forex trading is taking advantage of price changes in a pair to get profit. But what if the market conditions are sideways? What strategies are suitable for dealing with this sideways market?
If we divide the types of trend conditions. Then we get market conditions that are trending or rally and flat or sideways market. In rally movements, traders are usually easier to catch profits, because prices tend to move in one direction of the trend, either up or down.
But in this article, I don’t discuss more trading on the trending market. But we will focus on finding a trading strategy on the sideways market.
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Sideways market explained
A sideways condition is a market that tends to be flat, price movements go up and down within a range that does not form a trending market.
A sideways market is a condition in which price movements tend to move in a narrow range and over a long period of time. This condition is markable by price movements with a price range that is limited by support and resistance.
In a sideways condition with a narrow price range movement, it often makes it difficult for traders to get profit due to flat movements. But sometimes this sideways condition is used by traders to get profit with a strategy that has been designed to overcome sideways conditions.
The sideways market often occurs after the trend phase has weakened and is consolidating before a trend reversal or continuation.
Example sideways market
In the most severe sideways condition, when the price doesn’t seem to be moving, candlestick patterns line up and form a very tight from high to low. This condition is quite difficult to capture profits because of the very narrow movement. Even covering the spread costs requires a longer waiting time.
Here the example sideways market condition after a pair move downtrend.
Sideways conditions do not always form the same pattern, therefore not all sideways conditions will be used by traders to make transactions.
On random or choppy sideways, this will make it difficult for traders so that traders tend to choose not to trade in these conditions.
The example image above is silver with random sideways conditions, and this is where most traders are waiting for a breakout if they are going to make a transaction.
Because not all sideways conditions will be easy to catch profits, traders will look for sideways conditions that have price movements in a fairly wide range. The sideways ranger forms swing high to low within a certain price range but over a wider range.
To find the range of the sideways market you can draw manually using a horizontal line capturing the high to high and low to low. Referring to the horizontal line can be a reference in determining the entry point. While the exit point, you can determine with price action and the help of the horizontal line.
Advantage and disadvantage sideways market
The sideways market condition is one of the flat trend conditions, where the movement doesn’t go anywhere. Of course, this condition is different from the trending market, where the direction it goes is clear when the trend is up or down.
In the sideways market there are also advantages and disadvantages for the traders, including the following:
- Good for saver traders. Since the sideways market has slow movement. It can save traders from not getting an entry signal yet and it reduces the number of trades which are usually more than five times a signal because sideways are even less than twice a signal.
- Difficulty to get the best maximum profit. The sideways market trend has a narrow movement. So it is difficult to get the maximum profit target, this is limited by the movement in the sideways range.
- Good for experts. Short-term trading experts can seize opportunities in the sideways market. These are experienced traders and have strategies that rely on sideways market conditions.
- Bad for patience. While the market is forming a pattern of movement in a narrow range, traders may let their patience out of waiting too long.
- Great for exercising patience. The sideways market can train traders’ patience in waiting for incoming trade signals. Be patient in waiting for prices to reach support and resistance, or a breakout occurs after the sideways phase ends.
- Bad for aggressive traders. The sideways market is slow-moving and narrow. An aggressive trader who may lose his patience when he is used to trading in high volatility.
Working in a sideways market
Working in sideways market conditions should not be careless, everything must be calculated properly in terms of risk and targets must be measured precisely.
To determine targets in sideways conditions, traders can take several measurements of the upper and lower ranges of the support and resistance that are formed during sideways conditions.
Besides, traders also have to be observant, whether the sideways market provides trading opportunities or not. Because it will be very difficult when the sideways price movement is only a few pips. Even covering the spread costs will be difficult, not to mention the wrong entry position.
How to identity sideways market condition
To identify sideways conditions, you can use horizontal lines to draw support and resistance levels. Sideways conditions will rarely occur if the price crosses the support and resistance levels.
Even if there is a breakout, pay attention to whether it is a breakout signal or just a temporary movement. The price sometimes crosses the sideways range, but eventually returns to the sideways zone.
However, if the breakout is the beginning of the formation of a new trend, traders should follow the direction of the newly formed trend.
How to trade in a sideways market
Previously we mentioned that not all sideways conditions are the same, and not all sideways conditions are worth trading. So traders should also be aware when sideways conditions are not worth trading. He must stay away from the market for a while.
How to trade when the sideways market can try following some strategy tips for sideways market conditions.
Determine whether Sideways market worth or not
The first step when dealing with sideways conditions is to observe and determine whether the condition is worth trading or not. A good sideways condition is when the distance between support and resistance is in a wide range.
To determine a safe sideways condition is to use a daily timeframe, to see the bigger chart. But the drawback is that you need high patience in waiting for the price to reach the support and resistance lines.
A narrow price movement in a sideways condition will only bring its own difficulties and it is not worth trading.
The way to trade in the image above is to wait for the price to reach the support line or resistance line. By combining your understanding of reversal candlestick patterns.
A tight sideways market is not worth trading
Tight sideways conditions will make it difficult to trade, this condition is the price movement is completely flat. People call it the market choppy.
The picture above is an example of a sideways condition with a narrow price range, or some say it is a choppy market.
Narrow conditions of movement will eat up your patience to wait for the price to move, so it’s better to stay away from market conditions like this.
Based on experience, choppy market conditions often experience floating loss, which is not in line with expectations. This condition often occurs after a large trend has occurred and the market is in market consolidation.
Don’t ‘cut’ your trading account
Don’t waste your capital, if market conditions are uncertain, you should refrain from trading. Because the trend is clear, sometimes a trend reversal occurs. So trading only when you confident with the trend that occurred.
Remember in forex it is not about the number of transactions, but rather the quality of an entry point. If the sideways conditions are very tight, don’t force yourself to open a trade. Sometimes being quiet without making a trade is better than being aggressive in unfavorable market conditions.
Make sure you calculate risk and reward
Prices are essentially moving dynamically when prices touch the support level where sideways conditions indicate a short position. But sometimes a breakout occurs, this is what must be anticipated. By making a risk-reward ratio plan, traders will be much safer.
Trading strategy in a sideways market
In fact, there are various strategies that traders can apply in sideways market conditions. However, every strategy has its own advantages and disadvantages. Some traders try to use an oscillator such as Stochastic and/or use William% R or use MACD.
All of these oscillator indicators serve as a tool to identify overbought and oversold. By combining several oscillator indicators you might hope to get the best signal for your position.
Using the oscillator indicator is optional, but it is not the best. However, you can test it periodically by using this tool.
Another strategy that is no less interesting is trade diversification. In some cases, different pairs often have either a negative or positive correlation. For example, the EURUSD and EURJPY pair often experience unidirectional trend movements, if EURJPY rises, EURUSD tends to rise as well.
In a sideways condition, traders have difficulty determining the direction of the next trend. Because it’s in the consolidation stage. Therefore, traders try to diversify their trades in the two pairs by open buying in one pair and selling on the other pair.
Then traders will wait for further movements to find a definite trend after the sideways stage ends.
What is better, sideways vs trending market
Trending markets are preferred by traders to sideways markets. The reason is clear that in trending conditions, the price movement tends to be in one direction according to an up or downtrend. Even though there are bounces, it is often only a temporary movement before continuing on the major trend.
In trending conditions, the chances of getting a profit will be much more maximal. However, you must be observant where the trend will end which is indicated by the weakening of the trend’s strength.
When the trend starts to weaken, the safest way is to liquidate profits. Because after a strong trend occurs, there will often be a consolidation that signals a reversal
Meanwhile, in a sideways condition, especially in a tight movement, it will be difficult to get profit. Say the price is sideways by forming a wide support and resistance range of only 15 pips.
It will be really difficult for you to get the right price at the beginning of the trend reversal. Even after opening a position, the price often goes against the direction of your position.
The sideways condition is a difficult one to trade. This requires courage and expertise in analyzing ongoing sideways movements. For short-term traders, it is still possible to capture profits at the risk of being ready to bear them.
If a trader is unsure about sideways conditions, the safe way is to wait for that stage to over. While waiting you can refresh your mind by drinking a glass of hot coffee that is bitter and sweet. Like your trading results.
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