The trend is your friend is a catchy saying and one of the best-known market sayings. A trend occurs when prices of an asset continue for a certain period without much deviation in the price. If the price of an investment is not trending, it’s usually rangebound. No hard and fast rules exist that tell you how often a market is trending compared to moving sideways. Trends occur until they don’t.
An uptrend will terminate when buyers unwillingly pay higher prices for an asset. A downtrend will expire when sellers unwillingly offer their assets at lower prices. Understanding the jockeying that goes on when a market is trading sideways is essential. There are also different types of sideways markets. Some occur for extended periods, while others are consolidation phases during an uptrend or a downtrend.
What is Trading in a Sideways Market
If you trade cryptocurrencies, you might consider becoming familiar with rangebound markets that trade sideways. When a call is trendless, it trades sideways in a tight or loose range as traders jockey for positions lining up for a future move. When a market is trendless, participants usually do not have enough conviction or information to push the price of an asset higher or lower. The trend-bound nature of price action might frustrate some, but those adept at rangebound trading markets generate revenue using specific technical analysis indicators.
Using Bollniger Bands
There are plenty of technical analysis tools that can be used to evaluate a rangebound market. One of the most popular is the Bollinger band, created by John Bollinger. The Bollinger band uses an average price and the variance around the average price to create an upper band and a lower band. The default for the Bollinger band strategy is to create a 20-period moving average and use a 2-standard deviation range of the prices above the moving average. The Bollinger band high is two standard deviations above the 20-period moving average, and the Bollinger band low is two standard deviations below the 20-period moving average.
How Do You Use a Bollinger Band Strategy in a Sideways Market?
You can see from the daily chart of Bitcoin that it has an overlay of the Bollinger bands that several signals might show the next direction of the exchange rate of Bitcoin. One often used strategy is to purchase Bitcoin when the exchange rate hits the Bollinger band low and sell the exchange rate when the price hits the Bollinger band high. The chart would provide a good opportunity when Bitcoin is moving sideways. When it is trending lower, the strategy might not work as well and provide you with times to purchase when the market is trending lower.
Sideway markets can be very choppy. If you are looking to trade the next trend, you might become frustrated with the choppy nature of prices.
When you trade a sideways market, you want a risk management plan that takes advantage of choppy price action. If you are trying to make much more than you lose on each trade and the movements are sharp and small, you will likely experience challenging trading conditions. Another solution might be to make on each transaction as much as you plan to lose and scalp the market by entering and exiting quickly.
Scalping is a trading system specializing in making fast, small profits by purchasing and selling quickly. You want to ensure that you have a strict risk management system and real-time access to prices. A successful scalper of cryptocurrency will have a much higher ratio of winning trades compared to losing trades and attempt to keep the number of winners equal to the number of losing trades. You would also want to ensure that the bid-offer spread on the cryptocurrency you are trading is relatively tight. If the Bid-offer spread is wide, getting into a trade and getting out of a transaction might consume a large portion of your profits.
Before you embark on trading in a sideways market, you want to make sure that you separate this style from a longer-term class, like trading a trend. In contrast, your trend trading style might require that you add to a position while it’s moving higher, and a scaling type might require that you take profit at the same level.
The Bottom Line
The upshot is that there are different trading styles that you can use to trade successfully during sideways market conditions. To start, you need to identify periods when the market is rangebound and when a market is trending. You can then use a technical analysis tool like the Bollinger bands to evaluate periods when the market trades sideways. The Bollinger bands can signal when to purchase a cryptocurrency and when to sell a cryptocurrency. Before you start trading a sideways market with Bollinger bands, you want to ensure that you have a risk management plan that can work successfully with a short-term scalping trading strategy.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.