Trading Strategies for Sideways Markets

In November, the stock market was branded a “sideways market”, which means that assets’ prices remained mostly banded in on both sides by support and resistance levels. A support level refers to a minimum level the stock reaches before which traders grow interested again and buy it, sending it upwards. A resistance level is a ceiling, after which traders feel it’s time to sell, and the price drops.

Sideways periods are times when supply and demand forces keep each other in check, and stock prices don’t run away in any given direction. This phenomenon is not unique to stock indices like the Dow Jones Industrial Average or the S&P 500. We might also find it in the forex market or the commodities market, for instance.

Traders know that, more often than not, a sideways market means the price trend that came before, whether it be an upturn or a downturn, is going to continue after a break.  The reason for the break – or sideways price action – is that traders are waiting cautiously for any sharp movements to appear in the market. When the period continues, (and it sometimes continues for several years) traders feel increasingly confident that no sudden reversal is about to happen. This could presage the continuance of the original trend and, with it, the end of the sideways market.

Sideways markets have a reputation for presenting unusual challenges to day traders but join us now as we point out some of the ways to take advantage of such times, whether your interest is in CFD share trading, commodities, or forex.

A Straightforward Approach

Once the sideways market situation has been identified, it’s not likely that an instrument’s prices will jump much above point X, or drop much below point Y. This, in a way, makes for a simplified trading strategy that could cause a trader to open a “buy” deal when prices have sunk almost to support level Y, since we know prices are soon likely to rebound. Alternatively, if prices are climbing near resistance level X, a trader may open a “sell” deal for the instrument. After all, the signs indicate that prices could soon stall and sink. These scenarios, however, are only based on the principle of a sideways market and not to be construed as a guarantee or any type of trading advice. Additionally, Stop loss orders could be helpful here, as traders often place them a little below the sideways market’s support level in case a price breakout occurs.

Options Trading

Inherent in dealing with sideways markets is the high frequency of trading that some traders pursue in order to pursue more potential gains. For each trade, you will need to figure out the entry and exit point that’s appropriate, place your stop-loss order, and monitor the deal over time. This might be considered a drawback, especially if you have limited time to spare.

As an alternative, options trading would give you the opportunity to decide on a date when you believe prices could break out in a certain direction, and potentially see gains (if things turn out as hoped). The risk, of course, lies in the fact that they might not.

Shifting to a real-life example, namely the S&P 500’s movements in November, we see the resistance level holding back the index had been 3,900. Mid-month, the S&P broke through that barrier. What traders wanted to know, however, was whether or not the bulls in the market would permanently break the sideways trend, turning the old resistance level into a new support level. Some felt that this question would turn on the point of price action in the following week. If prices soared significantly higher, or if positive economic data came in, it could make sense to expect a bullish run.

You’ll know you’ve met the end of a sideways market when prices not only burst above the resistance level, but go on to soar beyond it. A bear market could be on the way if the opposite occurs, and prices fall way below the support level.  

Wrapping Up

Another point made by experts is that it’s a good idea to arrange a carefully diversified portfolio in a sideways market. The power of this is in saving you from a big loss if the market suddenly breaks out.

As it turned out, the latter part of November saw Fed chief Jerome Powell signal that the rate hike in December would be only 50 basis points, which spurred the S&P into a 3.1% leap all the way up to 3,943.42. The Dow Jones was up 2%, and the Nasdaq Composite rose as much as 4.4%

With regard to hopes of continued bullishness, analysts caution that the Fed’s loosening of policy is likely already priced into the market, however we are still in volatile times so whatever actually happens in the forex market is yet to be seen.

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