Wzrd lesson: dealing with a sideways market
A sideways market refers to a market with horizontal price movement, though it can sometimes form within an ascending or descending channel. In both cases, the price remains within a stable range.
A
market typically alternates between two phases: trending movement and slower or
sideways movement 📝
These are natural parts of the same market we
trade. Markets do not always trend; in fact, most of the time, healthy assets
remain in a range before making their next impulsive move.
This pause is often a process of gathering
more liquidity in the current zone in preparation for the next move or a
reversal. It occurs due to reduced
liquidity or an equal fight between buyers and sellers. Once more participants
join the market, one side will gain dominance, leading to a directional bias.
After significant moves, this type of price
behaviour is frequently observed in indices like S&P 500 and DOW, and it has
become increasingly common in assets like Bitcoin and Ethereum.
⚠️ Primary Dangers
In a sideways market, there is no clear bias, and no single party is in charge. It’s essentially a dogfight zone.
When the market attempts an upward breakout, buyers push the price higher, but sellers respond aggressively with panic, pulling it down 📉 Conversely, when sellers push the market lower, buyers jump in at support levels with FOMO (Fear of Missing Out), pushing the price back up 📈
This results in many fake breakout attempts as well. Sometimes even they don't hit the full-range support/resistance due to early actions from sellers/buyers!
Overtrading is the biggest danger in such a market. It’s important to take trades carefully and avoid low-liquid assets, as they tend to experience extended moves that frequently trigger stop losses (SLs).
These assets cannot handle sudden panic selling or FOMO-driven buying.
🚫 Methods to Avoid
The best way to trade in a sideways market is to buy at the low and sell at the high of the range, while avoiding the middle. However, by the time you identify a range, several days or weeks may have passed without trading, increasing the pressure to engage, which can lead to unnecessary losses.
Using tight SLs in a sideways market is not ideal, as they are likely to get triggered. At the same time, using excessively wide SLs can destroy the risk-to-reward (RR) ratio. Timing is crucial when trading in a range, as extended moves beyond recent highs or lows are common, with most traders placing their SLs slightly above or below these levels 🔑
⏰ More Time
Sideways markets often take a considerable amount of time to break out of the range. During this period, charts typically form patterns or technical formations, which break out once they mature 🧘🏻
💭 What is Not a Sideways Market but Looks Like One?
Avoid trading in dead markets, where price moves slowly at the bottom for extended periods, sometimes years. These are not true sideways markets but rather stagnation zones, often following a death-spiral dump.
Sideways markets are meaningful only when they occur after a strong trending move. For range trading, high-liquidity markets are the most favourable.
🚨 I have provided an example below that highlights the overshooting tendencies of price action along with early reversals from S/R zones 🤩
Chart:
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