Sideways Trends in the Stock Market: What They Are and How to Profit
- November 8, 2024
- 509 Views
- by Arun Singh Tanwar
You often hear traders say, “The market is sideways; let’s wait for a direction.” This saying perfectly tells the story of a sideways trend. If asked to explain in simple terms, a sideway trend is where prices move up and down within a narrow range without going significantly higher or lower. During these times, traders can feel frustrated as they watch prices bounce around, making it hard to find good opportunities to buy or sell. However it’s not all bad, often about the calm after market phase where buyers and sellers settle to balance the market.
In this article, we’ll explore what a sideways trend is, how to spot it, and effective ways to trade during these times. By learning to recognize and adapt to sideways trends, you can improve your trading skills and make smarter decisions, no matter what the market is doing. So let’s begin with.
What is Sideway Trend/Sideway Market?
A sideways trend is commonly known as ranging market, horizontal trend, sideway market, or consolidation phase in the stock market. It happens when the prices of stocks, commodities, or securities don’t really move much—they just kind of hang out in a narrow range for a while.
Another way to put it, a sideways trend is when prices move horizontally between clear levels of support (where prices tend to stop falling) and resistance (where prices tend to stop rising) as the supply and demand are almost balanced. Instead of shooting up or dropping down, prices stay pretty stable, moving slightly up and down but not enough to make a noticeable trend.
It’s like a tug-of-war between buyers and sellers, with neither side able to win, so the price just stays stuck in a range.
During this time, prices don’t go up or down much but keep bouncing between these levels. This often happens after a long trend, giving the market a chance to take a breather. It’s hard for prices to keep rising or falling sharply without a break.
Volume, which shows how much trading is happening, usually stays steady because supply and demand are balanced. But when something big is about to happen, like a breakout (price moving above resistance) or a breakdown (price dropping below support), volume can suddenly spike.
For example, Kotak Mahindra Bank’s stock price has been trading between ₹1,600 and ₹1,700 for several months between March to September 2021. Instead of climbing higher or dropping lower, the stock price keeps fluctuating within this range. This is a sideways trend.
During this trend, there’s no clear winner between buyers who think prices will go up (bullish) and sellers who think prices will go down (bearish). Buyers who think the price will go up and sellers who think it will go down are evenly matched, leading to a stable price range. It’s like the stock is taking a break, or in “pause mode,” waiting for something to happen that will push prices in one direction or the other.
Characteristics of Sideways Market
The primary feature of a sideways market, or a ranging market is the lack of a clear trend. But beside this, there are many other features that you may observed during a ranging market, such as:
1. Side-to-Side Price Movement: Another key traits of such times is that often prices move back and forth within a narrow range, not really going up or down much.
2. No Clear Direction: The market isn’t trending up or down, making it tough to predict what’s next. That means, hey traders are still deciding which way to go!
3. Bouncing Between Levels: Prices keep bouncing between set support and resistance levels without breaking out.
4. Low Volatility: Low volatility is another key trait of sideway trend. Which means the market is pretty calm with smaller price changes, not much excitement.
5. Can Last a While: This sideways action can stick around for some time, often leading to a breakout eventually.
6. Trader Indecision: Traders might feel stuck, unsure when to jump in or out because there’s no strong trend.
7. Less Trading Activity: There’s usually less trading going on as people wait for a clear signal or breakout as the buyers and sellers are still battling to win one direction.
Limitations of a Sideways Trend
Although, traders merely prefer to trade during choppy markets or sideways trend. Here are few setbacks what makes it not an ideal time to make a move:
- No Clear Direction: In a sideways trend, prices just move back and forth without a clear direction. It’s like being stuck in limbo, making it tough to decide if you should buy or sell.
- Smaller Profits: Since prices don’t make big moves, there’s less chance to score big gains. Traders might find it hard to make significant profits in such a stable market.
- False Breakouts: Sometimes, prices might briefly break out above or below the range but then quickly snap back. These false breakouts can trick traders and lead to losses if you jump in too soon.
- Low Trading Volume: During sideways trends, trading volume often stays low because supply and demand are balanced. This can make it harder to find real opportunities and can lead to misleading signals.
- Choppy Trades: Prices bouncing around can create a choppy market, where frequent small movements can be confusing and lead to losses if you’re not careful.
Strategies for Profiting in a Sideways Market
If you want to make the most of a sideways market, here are some straightforward strategies to consider:
5-Point Investment Strategy
In the 5-Point strategy, you create a buy or sell strategy based on every 5-point movement in a stock’s price. For example, let’s say you buy 500 shares at ₹100 each. With every ₹5 drop in price, you buy an additional 100 shares. So, if the stock price falls to ₹95, you buy 100 more shares, and if it drops to ₹90, you buy another 100, and so on. Similarly, when the stock price starts recovering, you sell 100 shares with every ₹5 increase in price. This strategy helps you average down during dips and secure profits during recovery. You can focus on dividend-paying stocks for steady income even when prices aren’t moving much.
Wait and Watch
Sometimes, the best move is no move at all. If the market is stuck in a sideways trend, it can be hard to find good opportunities. In this case, many traders prefer to sit back, keep an eye on things, and wait for clearer signals before taking action.
Capturing Small Profits/Investment
If you’re day trading and find yourself in a sideways market, one approach is to focus on minimizing losses rather than chasing big profits. Aim to break even or keep losses small, which can help you stay in the game until the market starts moving again.
Use Wider Stop-Losses
Sideways markets often have small price swings, so traders might widen their stop-loss orders to avoid getting stopped out too quickly. This allows you to give the trade some breathing room while still protecting yourself from significant losses.
Extend Your Time Frame
If you usually trade over short periods, consider extending your time frame. In a sideways market, it can be better to hold onto positions a bit longer, especially if you spot a promising pattern on a longer-term chart.
Look for Breakout Opportunities
Even in a sideways trends, a breakout is bound to happen eventually. Keep an eye out for signs that the price might break out of its range. When it does, you could potentially catch a new trend early and profit from the shift.
Also Read: Breakout Trading
In A Nutshell
The sideways market can offer investment opportunities if you can spot the sideways trend and use a solid trading strategy. Since the price moves between established highs and lows, you can potentially buy low and sell high if you play it right. However, it’s important to wait for a clear direction before making any trades.
To get ahead, consider using demand-supply dynamics. This approach helps you identify exceptional support and resistance zones, giving you a better sense of where potential breakouts or breakdowns might happen. You can learn this easily by decoding the secrets via YouTube sessions for free.
FAQs
Can a sideways trend be a sign of a future breakout?
Yes, sideways trends often precede breakouts. After a period of consolidation, prices may eventually break out of the range and start a new trend.
Is a sideways trend a good time to trade?
Not often! It can be if you have a strategy for range trading. However, it may not be ideal for trend-following strategies, as there’s no clear trend to follow.
How can I use technical indicators in a sideways trend?
Indicators like Bollinger Bands or RSI can help identify overbought or oversold conditions within the range, providing signals for potential trades.
How does market sentiment affect a sideways trend?
Market sentiment can influence how long a sideways trend lasts. If sentiment shifts, it might lead to a breakout or breakdown.