How to Forex Trade During a Sideways Market

Who practices Forex trading worries when facing a strongly downward trend or, on the other hand, wonders how to make the most of an upward trend. However, there is a third phase, which certainly occurs less often but peeks into the market from time to time, especially in certain historical periods: the lateral phase. That is, when the price does not take a precise direction and stays in a kind of limbo. It's a strange phase, apparently calm but which carries within itself the beginnings of risks and dangers. We'll talk about it in this article, offering some indications to correctly identify a lateral phase and exploit it to the fullest.

How to identify a lateral phase

At a glance, a lateral phase is evident. If the price seems to draw a flat line, which goes neither downwards nor upwards, then it is in a lateral phase. In reality, it is rare for a lateral phase to be visible to the naked eye, and without fear of contradiction. In most cases, everything is much more chaotic, so it is necessary to adopt precise techniques, albeit simple or even trivial, to recognize a lateral phase as such. These techniques involve some elements that traders know well, as they are the subject of pre-trade analysis and evaluations. Obviously, we are talking about highs and lows. If the market is in a lateral phase, it does not mean that the price is stationary. On the contrary, it can happen that it is the same in motion and that the oscillations are still heavy. It is not mobility that is the discriminating factor, but rather the absence of directionality. The discriminating factor of a lateral phase, therefore, is the permanence of a price within a range. Now, this range is enclosed by a minimum and a maximum, which are always the same.... Or thereabouts. It follows that the best way to identify a lateral phase is to analyze recent highs and lows. If these are always the same, or at least incredibly similar to each other, then we are facing a lateral phase. Also keep in mind that in such a situation, the lows take on the role of support, while the highs take on the role of resistance. In fact, prices that are apparently rising, if there is laterality, bounce against the resistance; while prices that are apparently falling bounce against the support.

The hidden risks of the lateral phase

At the level of collective imagination, of superficial knowledge, it seems that no danger can come from a lateral phase. Yet, just as sailors fear the doldrums (at least those of a few centuries ago), traders should also fear the lateral phase. Fear it just enough, without letting oneself go to unjustified paralysis but also without lowering one's guard. The truth is that the lateral phase hides some "strange" dangers, perhaps counterintuitive, but which can still cause great damage to those who practice Forex Trading (and not only). First of all, it is never clear when a lateral phase should end. We are not facing a pre-established "pause" period, even if only implicitly. We could consider it as an interlude, the moment preceding an explosion in a bullish or bearish direction. Therefore, the trader could be surprised by the end of the laterality and the beginning of a clear trend, perhaps even a strong one. The consequences of this phenomenon are clear and evident, and it is not even necessary to mention them. Another risk is still suffering from the oscillations of the lateral phase, which can also be massive. Let's remember: a lateral phase is not given by "flat calm", prices do not stop moving. Rather, the lateral phase is given by the presence of a defined range, within which the price moves. Within that range, almost anything can happen. It goes without saying that if the range is too wide, we are not talking about laterality but about volatility, perhaps even chaotic, so there is also this distinction to be made. In any case, there is always the risk that the trader buys when the price is momentarily falling and purchases when the price is momentarily rising. It must be said, however, that at least on paper it is easy to remedy: after all, the price, at least in its maximum oscillations (support and resistance at the margins of the trend), is all in all more predictable than in other phases. However, caution is recommended even in this case, even when the price moves sideways.

3 tips for making the most of a lateral phase

So, how can you take advantage of a lateral phase? The first piece of advice, which is a bit like grandma's recommendation, is to behave cautiously as usual, so do not derogate from the rules regarding money management, risk management, as well as good practices of technical and fundamental analysis. For the rest, good approaches can be identified to be used during the lateral phase.

Do not open positions beyond the range

If the market is in a lateral phase, then it is very likely that the price will remain within the range. Obviously this is a general rule, not a mathematical one. So it can happen that the price bounces just beyond the edge of the range, rather than precisely on the edge. This opens up important scenarios, which if dealt with superficially can generate bad consequences. For example, the possibility of entering the market when the price is outside the range. As a general rule, this is not a wise choice, also because beyond the range you don't know what can happen. Specifically, it is not recommended to sell above the resistance, since it is likely that the price will return to the range and therefore decrease. Similarly, it is not recommended to sell below the support, because it is likely that the price will rise, precisely to return to the range.

Keep an eye on the breakout of pivot points

While it is true that it is good to ignore the moments when the price is outside the range, on the other hand it is necessary to pay close attention to when the pivot points are broken, that is, when the price stably exceeds, perhaps in a double round and on two occasions, a support or a resistance. It is in that case, in fact, that the lateral phase is approaching its end, and it does so so quickly that it does not allow for hesitation on the part of the trader. Generally these movements, these sudden changes in the market structure, are concomitant with volume imbalances, with drastic increases or decreases. Understanding when a support or resistance has been broken (well beyond randomness) is essential to update one's short-term strategy, to prepare (possibly quickly) to react to an upward trend rather than a downward trend. It means in the worst case simply "saving oneself", not losing; and in the best case putting oneself in a position to also take advantage of the new trend.

Avoid short-term intraday trading

If there is a moment when the lateral phases can turn to the end, that is... At night. That is, when Forex, like any other market, concludes a day and is about to start another. It's true, Forex "never sleeps", except on Saturdays and Sundays of course, but it's also true that it is heavily influenced by stock market sessions, so it's as if it goes into stand-by mode. Well, when a new day begins, prices often realign differently from the night before. In some cases, they undergo a break in the lateral phase. This is even more true when we are talking about the transition not from one day to the next, but from Friday to Monday. During the weekend, anything could have happened, and the effects of that "anything" are bound to occur suddenly, almost in one fell swoop, at the opening of trading.

Monitor external factors

Finally, always pay attention to what happens outside the market. Often, it is precisely an external factor that decrees the end of the lateral phase and the beginning, perhaps disruptive, of a trend (whether ascending or descending). In fact, often the market itself takes a lateral phase, if it is waiting for the outcome of a pending event or news. Therefore, it is absolutely physiological that when that event occurs, prices exit the lateral phase. This means one thing: never stop practicing good fundamental analysis. Even when it seems that technical analysis is sufficient unto itself, and that the chart alone is enough to gather all (but really all) the evidence needed to place good trades, continue to monitor what is happening in the financial, monetary, economic and political context. If you do, you will be able to notice the change of course in time, or react in a timely manner.