Sideways Markets: To Trade or Not To Trade

Hey Guys! This is Nathan Tucci, and I have been struggling with something lately: Do sideways markets make easy profits for traders, or is it a death-trap waiting to happen?

I see two very reasonable, logical answers to both sides of this argument, and I will explain them briefly so you know where I am coming from, then I would love for you to leave a comment explaining your view about the matter.

There is the idea that a pair moving choppily across your charts is easy money for a trader because in this kind of choppy price-action, all one has to do is buy the pair when it starts to get to the bottom of the choppy channel, and sell it when it gets to the top of the channel. Now we are obviously not talking about massive pip gains, but if it’s sideways price-action on a daily chart, you can make 200 pips from the top to the bottom of the channel by selling high and buying low. In this kind of trading, the choppiness of the market almost serves as a safety net because you can trade without too much worry of it taking off on a long trend the other way; you have a lot of confidence that it is going to come back to the other side of the channel.

Let’s look at a chart to better visualize this side of the argument:
(you can click the chart to view in full size)

Okay, so in the above chart of the GBP/CAD, there has been a 6 month long channel between 1.6100 and 1.5400. Logically, you could say that this would make for very easy trading because the channel is so well-defined that any time the price got near 1.6100 you could sell and make a few hundred pips, and any time it got near 1.5400 you could buy and make a few hundred pips. This kind of trading would be simple, strategic and profitable; BUT there is the other side to this argument.

The other side says that a choppy market is not trade-worthy. That it makes no sense to trade in a sideways market when you can find other pairs that are trending up and down. After all, without any kind of a trend on your side, how could you justify a longer-term trade (like the daily ones we were talking about above). This side of the argument also suggests that there is eventually going to be a break out, and that if you are trading the top and bottom of the channel, you are going to eventually be on the wrong side of that break-out. What if you buy the low of that channel and that low ends up being the start of a new down trend?–Not good for you.

This side of the argument also says that most tools and indicators that should be used as an asset to traders do not work for this kind of a market so it is foolish to not take advantage of these assets, I mean, try drawing a trend line in the GBP/CAD daily chart. Why not use all of these great tools you have in your arsenal, because most of us need all the help we can get.

So, I understand both sides of the argument, and both seem to make sense, but how can such opposite views BOTH be correct? This is where you guys come in, I want to know what you think about trading in sideways markets. I know that the easy answer is “Oh, each trader has his own style, and it’s about what you are comfortable with”, but I want a real opinion. I mean, it’s not really about your comfort, it’s simply about making money–which side of this argument is going to help me make money? That’s what I want to know from you.

Thanks for reading, and leave those comments!!

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  • mike

    My view is always trade trending market…..sideway market is a good time to train our emotion. Therefore both market benefit me.

  • andu uyhe

    i need the send picture for the setup

  • Chbullock
  • Anonymous

    Hey Delroy, thanks for leaving a comment. It is good to see that you have strict guidelines for how you trade, that is key to being successful, and if those guidelines are working for you I would never encourage you to trade a different way… thanks again for reading and being involved!

  • Anonymous

    Well, Curtis, thanks for reading. Hopefully, you will get a better understanding of this kind of market condition and eventually trade with confidence to make nice profits! Thanks again for following!

  • Anonymous

    Hey Pat, thanks very much for reading along and adding to the conversation. Good luck in your trading!!

  • Anonymous

    Hey Alvin, thanks for reading. That is some great advice. I do like to use the higher time frames as a guide like you said, and risk/reward is a huge factor in whether or not a trade is worth taking…

  • Anonymous

    Thanks Eddy, I appreciate that full explanation. I do understand what you are saying, and you are right about crucial points of support and resistance. I would recommend a tight stop for any trader who is entering in hopes of a bounce of resistance or a fib level though because you never know when that level is going to get broken and when it does, the price can really rock…

    with that said, you are right that trading that bounce is a much higher percentage trade than it crashing through, so if you know what levels to look for, it can be some nice profits.

    Thanks again for the good advice.

  • Anonymous

    Thanks, JP, I agree with you very much. I would like to know how you determine entry places? A simple “sell high, buy low” strategy, or do you use a more detailed set of criteria to enter into trades?

  • Anonymous

    Hey Frank, thanks for the comment. And you are right in what you are saying, the issue is simply that a sideways market is unreliable. The potential is that you could enter in thinking that it would bounce back down to continue the channel but instead it begins to trend the other way, and this could happen to you 5 times in a row. The issue is forecasting whether a channel will stay a channel or not.

  • H_lass
  • Bukti

    I have not tried to trade channels yet, but I cannot see where the problem would be?All you would need to do is trade to each top and bottom,after a retrace,setting a stop loss just beyond the support/resistance lines drawn by the bottom and top of the channel?The price/trading  range would need to be worth it with regard to the spread available too of course.If a breakout catches eventually, the profits made prior to that happening should mostly outweigh the one small loss at the stop shouldn’t it?
    I am interested in any possible problems here that anyone could foresee?
    cheers, Frank Lobach

  • J P Marchant

    Since most pairs are only trending about 20-30% of the time one should also have a strategy for sideways markets. While trading the range bound pair you can set a tight stop loss. When the pair does finally breakout you would only have a small loss after your larger wins.

  • Anonymous

    You are right Ali, MM is the most important thing. However, there is more to MM than just risk/reward. For instance, there is the idea of lot size management that can make you a lot of money with a 1/1 risk/reward, like DDSMM teaches–do you agree with this?

  • Anonymous

    Hey Eddy, thanks for reading and leaving a comment! I certainly agree that support and resistance are key ESPECIALLY in a sideways market. But like you said, you never know when price looks like a test or re-test, but then actually breaks through to start a new trend. A channel can be good scalping, but if the price gets away from you, your risk/reward ration becomes a disaster without a tight stop (which most scalpers don’t like)

  • Anonymous

    Thanks for reading and being part of the convo, I agree that we need to be familiar with sideways markets because they are so often all that is on our charts

  • imi

    Hi
    As most of the time market is in sideway and we can’t get the real dominant trend at the right time, personally believe we should be pro in this form of moving.
    There are so many indis to help us but the right time for finding this way of trading is more important.
    For example before opening of Europe Market till 1 or 2 hours after that is a good time

  • Eddy

    Hello Nathan, I believe sisdways market trading can be useful especially with pairs that are retesting historic lows such as Usd/Chf  such as 0.8340 recently, how much times the market price hit that price level and retreated for more than 50 to 100 pips, because mostly the price would bounce up again after first hit. I find it more safer & successful for scalpers because it would surely gain them quick good pips in very few minutes and sometimes seconds(for any pair). It can be easy trading this sideways market even without using trendlines(that are still a must).
    On the other hand, if you want to stay on the safer side and not be caught in a breakout but instead in a false breakout or bounce trading, you better wait for few candles to retest the price before entering an order but this can be successful if you use low time frame candles to determine your entry or not.
    In my opinion, Price would always bounce after hitting a crucial resistance or support or psycological level at first hit, but if for example you are using a daily chart and the candle didn’t directly go to the price but closed near it and then retested that price the second day, then you better wait for a false breakout and not enter directly or forget the whole entry idea, the same can be said for lower time frames…

    Good Luck

  • Ali

    I think its all about money management.  If you can risk, lets say 30 pips to make 120 pips, that’s a 1:4 Risk to Reward ratio. I would give it a shot.  But I would take profits 75% on both sides of the channel.

  • RG

    Hi do you use any indicator with your strategy? and do you always trade 6 pairs daily in order to make the 100-200 pips? Thanks.

  • Anonymous

    Hey Lee, thanks for reading. You either need a better system or your own system… Are you available to spend a decent amount of time trading each day, or are you looking for an automated system to help make you money?

  • Anonymous

    You are correct about the Forex market, but I believe all markets are speculative. Nonetheless, and I am very much starting to believe that sideways markets should be taken advantage of, and that with good MM, profits should be made…. what kind of trader are you?

  • Anonymous

    I have also stayed clear of the Bob, but I think that my view is starting to change now that I see that high-probability trades can be made in channels… I hate narrow BB’s!… are you a longer-term trend-trader or short?

  • Anonymous

    What do you mean by learning the breakout?

  • Anonymous

    Yes Bill, I get what you are saying… So I am assuming you don’t load up on lot size in sideways markets since you are saying a little bit of cash?… and what are your main elements to determine the break-out of a sideways market?….. thanks for the comment, Bill. look forward to your response.

  • Anonymous

    Very true. As a trader (especially a full-time trader), you cannot ignore the market 30% of the time. . . by the way, I love that you base your trades on risk to reward–money management is very key and R/r is a huge part of that… did you happen to check out DDSMM, that thing is amazing.

  • Anonymous

    Hm, Fred, I agree with you that trends are great, however, I am starting to believe that channel-trading can give very high probability. For instance, I took a long at the end of that chart and had complete confidence that it would move back up and am now up over 80 pips… why not take that bounce when a trend could just as easily end as a channel could become a trend? Know what I mean?… Thanks for the comment, and I look forward to your response.

  • Anonymous

    Yes Jefferey, If you can clearly identify that market, the probability should be on your side, the issue is that you never know when the market will change… how should we determine that BEFORE it changes?

  • Anonymous

    Very cool, Jspider. I agree that movement is the only thing necessary to make money, but I am very impressed that you are profitable with all kinds of market movement. Maybe you could give me a little more detail on your trading style? I would love to see how you trade… if you are interested in having some conversation about it, email me at [email protected]; if not, no big deal, I just am always curious about all the different ways people make money in the FX market.

  • Anonymous

    Type your reply…

  • Anonymous

    Very true, Antny, I agree with you 100%. So, the perfect system would be to have an EA that identifies the market and then several sub-EA’s that trade accordingly…. Now that would be a money-maker.

  • Anonymous

    Yes, this is true, but the idea is not to hit your stops, right?

  • Anonymous

    Hey Sayed,

    I completely agree with you. As a matter of fact, I went long on the last candle you can see on that chart because it’s at the bottom of the range and am currently up 85 pips… If you can identify a way to make profits in any kind of market, you are right that it should be done. Thanks very much for your insight.

  • Sayed Haider

    Trading Consolidations like the one which is under discussion USD/CAD is highly profitable.
    If we are talking about a system and then generating money out of that system is called
    an opportunity. So here we have the opportunity of making money. We should completely
    take the benifit out of it. Spoting range market is itself is a source of great knowledge an especially in this market not to take the advantage of your knowledge is not good. In my opinion this market has got many ways to give you profit and if there is a system then go ahead and take the full advantage of the system and make the money.

  • Chwdhm

    Good read but thats what stops are for

  • Anonymous
  • Anonymous

    Thanks NJ, I appreciate you reading and leaving a comment. I do agree that there are good opportunities in sideways markets and will definitely look for entries in them with proper stop-loss placement.

  • Anonymous

    Hi Bob, yeah, I have always liked the trend too, but like you said there is not always a trend to be found, and a good channel can often provide many good trades in my opinion.

  • Bob

    Hi Nathan . I am a trend follower and prefer to stay with the trend. However all the pairs donot trend all the time. I would like to add this new strategy to my arsenal though. It looks good for risk reward ratio.

  • NJ

    With the proper use of stop loss’s you won’t get killed.  This and the fact that markets go sideways more than trending, makes sideways markets an execeptional opportunity,
    NJ

  • Royo1

    I f you’d like ‘;ll send a picture of my chart set up, just give me an emaill address

  • Anonymous

    Sounds good, Doug, thanks for the comment.

  • Anonymous

    Sounds good, thanks for the comment and advice!

  • Royo1

    Nathan: Yes it works beautifully, BB’s are a great, but you really need to be able to overlay the williams %r using 3 lines of 8,21 & 55 thats the key!  if you can set up the indicator like that and look at some charts you’ll see when the 3 lines converge at a sharp point in overbought/sold you almost always get at least somewhat of a reversal. 

  • Anonymous

    Hey Peter, thanks and great advice. That makes a lot of sense, and I will look into that for sure.

  • Lawsonpeter

    The first option, just drop down to a smaller timeframe and ALWAYS  place  quaranteed stops. However if the trading range is no more than  four times the broker spread, stay out 
    Hope that helps.
    Peter

  • Anonymous

    Ah, gotchya. I use BB’s, but never on such short time-frames. Perhaps I should begin to look into that… are you pretty successful with that strategy?

  • Anonymous

    Hey, thanks for reading and leaving the comment. Yeah, scalping definitely affords you the most versatility, but I have always liked the 4hr and daily charts best, so my issue is whether a sideways market is bad for those.

  • Allenke

     I trade them all, since I only do scaping I find I can trade any market. I have done trends with day trading, but I found I can make more pips scaping than any other way.

  • henry

    Hii nathan I think its obvious that you nevr trade sideway market cause you never know when it will stop being that way. plus, trends are good and you make more money with them you shoulnt waste time with sideways when other curencies have a trend. just my opinion but i say never get involved in the sideways markets