The Basics of a Sideways Market (👨‍🏫 if you have any specific questions, ask me at 👉 http://bit.ly/2IblW9d) Market participan…

The Basics of a Sideways Market

( if you have any specific questions, ask me at
http://bit.ly/2IblW9d)

Market participants can exploit a sideways market by anticipating breakouts, either above or below the trading range or by attempting to profit as price moves between support and resistance within the sideways drift. Traders who use a range-bound strategy should make sure the sideways market is wide enough to set a risk-reward ratio of at least 2:1. This means that for every dollar risked, investors make two dollars of profit.

Sideways markets also get referred to as choppy or non-trending markets. If the sideways drift is expected to remain for an extended period, investors can profit by selling call and put options with approaching expiration dates. For instance, you could sell a straddle, both an at-the-money call and a put option for the same underlying asset in the same strike and same expiration month. As the options’ expiration date approaches, the option premiums are eroded by time decay and ultimately if the market remains sideways will decay to zero.

Benefits of Trading a Sideways Market

Clear Entries and Exits: A sideways market usually has clearly defined support and resistance levels, which removes ambiguity about where to place entries and exits. For example, a trader can buy a security when it’s price tests support and set a profit target at resistance. A stop-loss order placed slightly below the sideways market’s support level minimizes the trade’s downside.

Risk and Control: Traders chase smaller profits when trading a sideways market; therefore, each trade is typically not open for more than a few days or weeks. This reduces the chance of a position being adversely affected by a bear market or unexpected news event, such as a terror incident. Trading in a sideways market allows traders to close any open positions before company announcements, such as earnings reports, and re-enter when the security’s price returns to support.

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