If you’re a fan of forex trading, you already know about sideways markets. Sideways or choppy price action occurs in all asset classes, not just foreign exchange. For more than a century, active investors have tried to develop techniques for earning profits in these uncertain conditions. Whether you have your own strategy for dealing with them or not, in this article we’ll look at some tactics you might find useful when trading in these conditions.
How to Trade When Forex Markets are Sideways
What’s the answer? While there’s no one-size-fits-all approach, many people use a four-part plan for dealing with see-saw prices in forex, stocks, precious metals, and other asset classes. Here are the steps you can try the next time you come face-to-face with sideways charts.
1. Evaluate Your Options
Step one is determining whether a given price pattern is indeed a choppy one. Luckily, the charts tell the story. A typical side moving pattern occurs shortly after a longish upturn or downtrend. Prices usually swing in both directions with apparent randomness as they try to consolidate before the next big up or down move. For beginner investors with little money the step of evaluation is especially critical.
2. When in Doubt, Stay Out
Look carefully at the consolidation section of the pattern. Is it getting wider as time passes or narrower? Or, is it maintaining a range bound upper and lower limit? Make a note of the appearance and shape of the graphics. If it’s narrowing or widening, consider sitting out for at least one or two sessions.
Before commencing forex trading after a consolidation, make sure that the pattern is either widening or remaining within clearly set upper and lower values. If one of those two situations occurs, then you can re-enter. However, spend time analyzing how the consolidation segment is behaving. Keep in mind that there are choppy patterns that are very tradable and some that are not. The trick for traders is to evaluate what kind of sideways movement is taking place.
3. Know What a Tradable Sideways Market Looks Like
Just because one stock is the best to buy now doesn’t mean your research is over. What types of side moving markets are worth your time? We already know that a narrowing box of choppy pricing soon after a large down or uptrend is a no-go situation. But there is at least one variation of a choppy pattern that is relatively easy to trade. When you notice a clear ceiling in the chop, as well as a defined bottom, consider playing the up-and-down swings within the box for profits.
Suppose the upper limit is 50.05 and the lower is 44.9, with repeated bounces back into the chop box off both those values. Hypothetically, a small breakout above 50.05 could be a profitable time to go short. Likewise, a break below 44.9 might signal a long play. Be careful to set high and low stops, depending on whether you go short or long. That way, you won’t be caught unaware before the next bounce occurs.
4. Practice in a Demo Account
What to do during those days when you’ve decided to stay in cash? Make the most of your time by practicing on a simulator. It’s an excellent way to sharpen skills, learn a few new tricks, and keep your mind occupied in a productive, positive way.