Lateral Thinking for Traders: 4 Key Tips

Sideways markets are never such a remote possibility. In fact, it happens quite often that, for a certain period of time, prices travel in an irregular manner, but without indicating a precise direction. In short, traders sometimes find themselves having to trade without a trend. What to do in these cases? It's a question that both those who trade with the trend (many) and those who trade against the trend (few) ask themselves. In this article, we explore the concept of sideways markets and offer some advice on how to profit, or at least not lose, during this unique phase.

How to recognize a sideways phase

First of all, it's necessary to know how to recognize a sideways market phase. It's not so obvious. Also because phases that seem sideways often hide a trend. This has some negative consequences, sometimes quite negative, for traders who operate taking the sideways movement for granted. A first check is visual, with the naked eye. When a price moves without a precise direction, but oscillates from one side to the other, this is a signal of a sideways market. Obviously, it's not the only necessary verification, far from it. The most important one is technical. From a technical point of view, there is a sideways phase when the price oscillates, regularly or not, between two well-defined extremes. In this case, the minimum and maximum are always the same. These levels, as is easily understood, take on the role of key resistance and key support. It's as if they were the roof and floor of the sideways phase, on which the price bounces almost as if it were a crazy ball.

The risks of a sideways market

Is the sideways market risky? In most cases, the lows and highs within which prices move during the sideways phase are never far apart, so the oscillations often don't consist of that many pips. It may seem strange, but it's physiological: the sideways phase, after all, is also a phase of equilibrium, in which the asset has momentarily stabilized. If the interval is too wide, the balance could be compromised. The sideways phases that last longer are precisely those with narrow intervals. This important characteristic makes the sideways market not very dangerous. The risk of losing is always around the corner, but even if you were to lose, there wouldn't be huge sums at stake (net of reckless leverage). In some cases, however, the sideways market is more dangerous than others. For example, when it draws irregular oscillations. In this case, it is difficult or even impossible for the trader to "dominate" the sideways phase, to act and not be subjected to it. Unfortunately, this happens very often. Even situations where the interval is "borderline," that is, it is in a condition where the lows and highs are stretched to the maximum, can cause a lot of problems.

Tips for earning in a sideways market

The first step is obviously to verify that it is really a sideways market. It's not so obvious actually. Also because, if the chart marked stable lows and highs with a given timeframe, using another timeframe could suggest a slightly different situation.

Check if it's in trading range

The most useful advice is to verify that it is really a sideways market. It's not so obvious actually. Also because, if the chart marked stable lows and highs with a given timeframe, using another timeframe could suggest a slightly different situation. The second step is to define the type of sideways market. There are at least two: in range and not in range. A sideways market is defined as "in range" when it draws oscillations that are all in all regular, that is, when the price, in its uncertainty, is still regular in its movements. All this, obviously, in broad terms and by approximation, as the price can never be regular in its movements. It's in the "in range" phases that the trader can find the best opportunities, and can best interpret the situation, especially when identifying entry and exit points. Conversely, when the market is not in range, more than sideways it is simply unpredictable. In those cases, insisting on trading, therefore in wanting to absolutely bring predictability to an element that is not only unpredictable but not even estimable, is really risky. It would be almost like playing gambling.

Take advantage of false breakouts

Perfection is not of this world, nor of sideways markets. It can happen, and in fact it is almost the rule, that, given a key support and resistance, these are momentarily exceeded without the sideways movement being definitively broken. The secret to understanding this seemingly strange concept is precisely the adverb "momentarily." In this case, we are talking about a false breakout of support or resistance. As already mentioned, it is an event that is far from infrequent. Therefore, the advice is to consider a breakout as a false breakout, if the market is sideways and there are no other elements to support the breakout hypothesis. This is a very important aspect, since trading as if you were in a trend when the market is still sideways means one thing, or rather two: losing money or going straight to the stop loss. The second is more likely to tell the truth, at least if the trend is prudent: a strategy is in fact to place the stop loss on the just broken pivot level.

Recognize when the market is about to enter a trend

Obviously, all sideways phases are destined to end. Some end soon, some persist for a long time. Essential, in any case, is being able to understand when a new trend is about to be born. Those who manage to understand it in time can seize significant earning opportunities. The problem is that a sideways phase rarely shows graphically signs of "nervousness" before ending. Real (not false) breakouts of support and resistance can occur almost suddenly. This is where the trader must make use of all his technical analysis skills, and in particular the use of various indicators. From this point of view, Momentum offers the best guarantees. Overbought and oversold indicators also perform well, at least in this case. A good signal is represented by significant changes, in one direction or the other, in sales volumes. In any case, always prepare for a trend breakout. In some quite volatile markets, such as Forex, sideways movement is always a rather precarious condition.

Stop

This is also valid advice. If you want to become a successful trader, you should - at least in some cases - stop trading. When it comes to speculative investing, especially high-risk ones like Forex, inactivity is more profitable than risky activity. Obviously, everyone - within the limits of doctrine - has their own risk management techniques. However, it is undeniable that trading in a situation of total instability and irregularity can be really risky. This concerns, as we have already specified, the non-range sideways market phases. These, in fact, do not offer any foothold, and always invalidate even the most scrupulous analysis.