Understanding Sideways Markets: Definition And Strategies

When you talk about stock markets, two terms are quite common, ‘bull’ and ‘bear’. In the former, prices exhibit an upward trend, whereas in the latter, they exhibit a downward trend. However, have you ever thought what if stock prices exhibit neither of the two? What if stock prices simply move back and forth within a fixed range?

Welcome to the world of sideways markets.

Read on to know the various aspects of sideways markets and ways to navigate them.

What Is Sideways Markets?

Simply put, a sideways market refers to a period when stock prices exhibit little or no significant upward or downward movement. During this phase, the stock’s price moves within a relatively narrow range. Let us understand a sideways market with an example.

Suppose the stock price of a certain company is trading between ₹950 and ₹1000 for several months or even years. Every time the price moves towards ₹1000, it fails to go beyond it or break through. On the other hand, every time it drops to around ₹950, it is pushed upwards. It keeps bouncing between these two levels without forming any clear uptrend or downtrend.

Sideway Indicator: How To Spot It?

Now that you have understood the meaning of the sideways market, let us find out ways to spot it. Here are a few sideways indicators through which you can identify these market trends:

Flat Price Movement

This is one of the foremost sideways market indicators. When prices neither rise nor fall much but keep on moving within a narrow range, it indicates sideways movement. During such periods, technical charts look relatively flat rather than distinct upward or downward shapes.

Highs and Lows at Same Levels

This is another indicator for sideways market. Stock prices keep hitting the same upper level and falling back. Similarly, it keeps hitting the same lower level and bouncing up. This shows that markets are stuck between two boundaries. And when it happens over several days, weeks, or months, it shows sideways markets.

Low Trading Volume

Low trading volume is another indicator for sideways market. Generally, investors trade when they have a clear idea of market movements. When markets do not give definitive signals, price movement becomes limited, which usually leads to lower trading volumes.

Strategies to Navigate Sideways Market

There are several strategies you can adopt to navigate the sideways market. Some of them are:

Avoid Jumping into Every Minor Move

Price movements are small and slow in the sideways market. Hence, you need to be patient and avoid jumping into every minor move. Before taking your position or executing your trade, wait for the price to reach a particular price level. Doing so can help you avoid unnecessary trades.

Clearly Mark Your Support and Resistance Levels

Support is the level where prices stop falling and then bounce back. On the other hand, resistance is the level at which the price stops rising and then pulls back. In a sideways market, mark your support and resistance levels. A clear mark about support and resistance levels can help you understand where to enter and when to exit. It helps you avoid emotional decisions.

Avoid Trading in Very Close Ranges

If you find the support and resistance levels too close together, it is better to avoid trading. When the range is tight, the price movement from support to resistance is very small, which means the potential profit is limited.

For example, if a stock is trading in a narrow sideways range where ₹1000 is the support level and ₹1010 is the resistance level, the difference is only ₹10. After accounting for taxes, brokerage, and slippage, the remaining gain becomes even smaller, making the trade less worthwhile.

Conclusion

Keeping a close eye on sideways indicator can help you navigate markets with ease during such times. You can adjust your trading strategy accordingly, generate meaningful returns, and avoid risks.

Source:

Investopedia