Are you looking for ways to trade sideways? If yes, then this article is for you. In this article, I'll show you some strategies and examples of trading sideways.

The term sideways refers to prices moving sideways without moving either way significantly. This means that the price has moved within a relatively narrow range.

So without wasting any further time, let’s get started.

Why Do Stocks Trade Sideways?

When a stock is trading sideways, it means a lot of indecision in the market. Many factors can cause this, but the most common reason is that there is no clear consensus about the direction the market is headed. This usually happens when the ask and bid price become the same, which means the buyers willing to buy the asset and sellers willing to sell the asset start to offer the same price.

What Are The Benefits Of Trading Sideways?

When trading sideways, there are a few potential benefits that traders could experience. One potential benefit is that traders could avoid the spread risk associated with trading in the market's direction. Traders who trade sideways could also avoid becoming trapped in a losing trade, increasing their risk-to-reward ratio. You can also find opportunities to buy low and sell high, increasing profits.

How Do You Trade Stocks Sideways? ( Strategies )

1. Diversified Portfolio

During a sideways market, the probability of your trades decreases. Many traders avoid trading in a sideways market, so a diversified portfolio can help you stabilize your investments. It's also essential as sideways markets are confusing and frustrating, so even a good trade can damage your trading psychology.

A diversified portfolio can allow for more opportunities to make gains when markets are favorable. When the asset price rises and breaks a critical resistance level in a sideways market, you can further hold your winning trade to achieve better gains. So you can have a better risk-to-reward ratio which is the core of trading.

A diversified portfolio can help you in sideways trading because it offers you the ability to reduce your risk. You will have a small stop-loss and a decent target to reduce the overall investment cost. Moreover, correctly timing the market becomes secondary during a sideways market, and balancing your allocation becomes more critical.

2. Breakouts

Breakouts are one of the best strategies for a sideways market because they allow investors to increase their profits. When an asset starts to move higher in price, it is said to have "broken out" of its previous trading range. It means the asset has exceeded its previous trading high point or has come close to doing so. This increased demand from buyers causes the asset price to increase, leading to a profit for the investor.

This trading strategy benefits swing traders who can patiently wait for their targets. When the market is consolidating, swing traders always have a sharp eye on the market, as breakouts on either side are very small. Many trading experts also say that a breakout in a sideways market increases the winning probability of the trade.

Moreover, sideway trend breakouts are also given importance as they indicate a trend change and allow investors to enter an asset at a lower price point than the asset has been trading for some time. This allows the investor to profit from the asset's future trend without paying the higher price point that the asset may have reached at some point in its trend.

3. Identify Potential Trade Setups

There are different types of potential trade setups in a sideways market, and each can benefit differently. These trade setups, such as a head and shoulder or triangle strategy within the sideways market, can help you achieve the targets of nearest support and resistance, enhancing opportunities for short-term gains, long-term gains, or both. Trading on potential trade setups can also help you make better decisions, increasing your winning ratio.

What Are Some Examples Of Sideways Trading?

There are many sideways trend examples, as a sideways market started in February 2018. The Dow made a low of 24,290 on 9 February and a high of 25,732 on 26 February. The market then started to circulate between this range until a breakout was witnessed on 27 august and momentum came back into the market.

A classic shorter example of trading sideways was witnessed in Dow in march 2017 and continued for almost two months. The dow had made a resistance of 21,169 on the daily chart. The dow tried to break the resistance multiple times and was finally successful on 1 June 2017. This sideways trend of Dow was a momentum-building area, and after that, a bullish trend was experienced.

Should We Do Sideways Trading?

Sideways trading can be risky, as it is possible to get caught in the sideways trend without realizing it. However, if done correctly, sideways trading can be a profitable strategy. It allows traders to capitalize on temporary market movements without investing fully in a single stock or trusting that the market will move in the desired direction.

Finally, we can say that if you are disciplined and confident about your trades, a sideways market will not be a problem for you. If you are disciplined, you should try trading in the sideways market.

Final Verdict

Trading in a sideways stock market can be crucial as it allows investors to close out any open positions before news announcements, such as earnings releases, and re-open them when the security's price shoots in either direction.

Many experts have different views about sideways trading; some recommend avoiding trading in these market conditions, while some look at this trend as a source of opportunity. So don’t worry if you have any similar views.