Sideways vs Trending markets on eToro

One of the first steps to take in your trading based on price action is to distinguish whether the market is trending or moving sideways. These characteristics of a market are extremely important for your decision on when to open a buy or a sell position and how to set up your trading strategy. Below you can find a quick guide on these two types of market behavior.

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Sideways Markets

A market is described to be trading sideways when the price of an asset moves within a relatively stable range and does not seem to be forming any specific trends over a certain time period. In simple ways, in a sideways market the price moves within a ‘channel’ or ‘horizontally’, between support and resistance levels, with no bearish or bullish trends. There are no new highs or lows reached by the price.

Why does this happen? Sometimes there is a certain time period where the supply and demand for an asset are almost equal and the security is in period of consolidation, with the price that is neither continuing a certain trend nor reversing. Consolidation may happen for several reasons, for example, after a period of great price movements as a result of some news when the market finally incorporates the information. It could also be the case that market participants are uncertain about this asset in terms of the direction of price. Such markets are referred to as non-trending because despite some price swings within the range the price level tends to return to some average value.

Indicators for a sideways markets

You hopefully realized that there is no clear upward or downward trend in the price of an asset in a sideways market and that it oscillates within a certain range; something as simple as the support and resistance levels would be indicative of the range the price is bound by. An average directional index (ADX) might help confirming the conclusion that the market is trading sideways, where values of below 25 in the index indicating that there is no clear trend present.

Which indicators could you use while trading in a sideways market? A trader might consider indicators that acknowledge the fact that there is an upper and lower levels of the range but also spot minor variations in volatility that happen meanwhile, such as the Bollinger Bands or the Commodity Channel Index (CCI).

Strategies in a sideways market

Once you have confirmed that your asset of choice is indeed trading sideways, it could be a good idea to determine the upper and the lower level of the range the price is bound by.

It may seem that these markets are quite hard to trade in, however because there are quite clear support and resistance levels it may be easier to identify entry and exit points for your positions on eToro and you can trade ‘within’ this range the price is moving in. In case the price is moving within a range, it is likely to be bouncing between its support and resistance levels; when the price is near the support level it may bounce back up and this could be a signal for a buy trade and vice versa, when the price is reaching resistance a trader might consider selling. There is a possibility of making many small profits over a big number of trades in this way. Don’t forget about the option to restrict your potential downside loss using the stop-loss levels on the platform and beware of the potential breakouts beyond the support and resistance that you did not account for.

There is also a possibility for you to make a profit by timing breakout points correctly, which can happen above or below support and resistance levels. When the price is crossing through the higher trend line a trader might consider opening a buying position and when the price is dropping through the lower level a trader might consider selling.

Trending Market

A trending market is the opposite of a sideways market, where a price of an asset keeps on closing at a higher or lower level (also referred to as higher highs and lower lows), following a specific price trend, upwards or downwards.

Indicators for a trending market

One of the common ways to determine whether is market is trending overall is to once again use lagging indicators such as the average directional index (ADX), which takes values between 0 and 100, with higher values indicating a stronger trend. The problem with this one is however that it does not identify the direction of a trend. Simple indicators like moving averages even can visualize the direction of a price movement on eToro, but also Moving Average Convergence Divergence (MACD); all of these help to identify direction and strength of a price trend, like on the image below.

Strategies for a trending market

Strategies in a trending market can be based on the idea that a price trend will continue in the upward or downward direction for some time and there are plenty of them out there for you to choose from. You might consider setting up Bull and Bear flags, trade based on triangular patterns, spot a head and shoulders strategy and so on. Instead of trading in the direction of a trend you might consider a contrarian strategy, trading against the market to try and generate profits, but do remember that this requires sufficient knowledge, skill and practice. In order to avoid large losses or to lock in a certain amount of profit there is always an option to use stop-loss or take profit on eToro.

One of the important component of strategies in a trending market is sufficient liquidity. Greater liquidity of an asset is likely to lead to more volatility or price movement in its price.

Possible Dangers

Identifying whether the market is sideways or trending may in fact be not as easy as it seems. One of the key questions to ask yourself here is what time interval you are focusing on. It may look like an asset is trending when you are considering a chart daily and at the same time it may look like a sideways market if you are considering a longer time frame, for example a month, and vice versa. On the image below you might consider Bitcoin as trading sideways within a range for a time period of several weeks.

If you consider a wider time frame of several month, it is possible to infer an upward trend in this asset. It truly depends on the time period you are considering in your trading strategy.

eToro provides a useful way to consider asset’s daily and weekly range by providing the appropriate data under the ‘Stats’ section for each asset.

Another difficulty comes from the fact that different traders identify highs and lows in different ways. The best solution to this problem is being consistent in your own methods of identifying new high and low levels, but also being open to the possibility of reconsidering your strategy when needed. Sometimes markets can be hard to categorize into anything other than being volatile, with many significant but also temporary price movements and that may bring additional risk into your trading.

Hopefully this article gave you a pretty good understanding of the differences between a sideways and a trending market. Remember to use your indicators correctly, beware of the capital loss risks and enjoy trading on eToro. Best of luck! 

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