Updated Sep 2, What is a Sideways Trend?
- Though predicting equity markets and stock movements are not easy, equity analysts use many methods and indicators to predict market movements.
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A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways price trend is also commonly known as a "horizontal trend. Traders can profit from sideways trends in several ways, from looking for confirmations of a breakout or breakdown to using stock options to placing stop-loss orders when the price nears resistance levels. It is not uncommon to see a horizontal trend dominate the price action of a specific asset for a prolonged period before starting a new trend higher or lower.
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Volume, which is an important trading indicator, mostly remains flat during a sideways trend because it is equally balanced between bulls and bears. It shoots up or down sharply in one direction, when a breakout or breakdown is expected to occur. When analyzing sideways trends, traders should look at other technical indicators and chart patterns to provide an indicator of where the price may be headed and when a breakout or breakdown may be likely to occur.
Profiting from Sideways Trends There are many different ways to profit from sideways trends depending on big movement in trading characteristics. Typically, traders will look for confirmations of a breakout or breakdown in the form of either technical indicators or chart patterns, or seek to capitalize on the sideways big movement in trading movement itself using a variety of different strategies.
Many traders focus on identifying horizontal price channels that contain a sideways trend. If the price has regularly rebounded from support and resistance levels, traders may try to buy the security when the price is nearing support levels and sell when the price is nearing resistance levels.
Stop-loss levels may be put into place just above or below these levels in case a breakout occurs. Advanced traders may also use stock options to profit from sideways price movements.
For example, straddles and strangles can be used by options traders that predict that the price will remain within a certain range.
However, it's important to note that these options may lose all of their value if the stock moves beyond these bounds, making the strategies riskier than buying and selling stock. Example of a Sideways Trend The chart below depicts a sideways trend, following a strong downtrendthat has lasted several months.
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These trends could indicate that the stock is consolidating before resuming its downward trend or perhaps preparing to reverse into a bullish trend. Compare Accounts.
- These situations are interesting for both trend followers as well as swing traders mean reversion.
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