Now it is possible to hear a revelation: the most successful traders are not those who make the right decisions at any time. These traders determine correctly than others whether to enter the market, which volume, where to install StopLoss and TakeProfit. They strictly follow their logic, no matter how strong the emotions are.
Hello from captain obvious: not all market situations are trading.
The market moves without any direction: not up or down, it moves sideways.
Today we will check out two classic forms of sideways movement, traps, which beginners fall into and what to do if there is a sideways movement on the market.
Types of the sideways trends
Sideways trends can be divided into flat and triangles.
Flat or `price corridors` are formations in which each high and low points are support and resistance levels, and approximately equal to the previous ones.
This is a market movement in which price fluctuates in the corridor.
The triangle differs from the flat: each maximum is lower than the previous one, each minimum is higher than the previous one. If you build two lines, the highs and lows of a triangle, you can easily imagine how these two lines cross at a certain point.
Triangle on the chart
News from captain obvious №2: you should be prepared for the fact that on the real graph the figures look less defined than on the charts.
You can only accept it, and the discomfort caused by this can only be corrected through training. According to the example above, the main thing is that the lines cross. Pedantic accuracy of construction is not so important: the lines will cross, even if it passes through the two top points, situated on the right edge. This is the most important.
Meet the turn after the sideways trend, as in the old joke about the dinosaur, you can meet it or not.
Often flat and triangles act as a turning point. In the same way, the tendency slows down there, in order to continue moving in the same direction as before.
Why are flat and triangles formed?
They reflect periods of uncertainty in the market. This market movement shows that participants have different opinions about the coin price movement.
What is the consequence?
From the sideways trend the market can follow any direction.
Let’s suppose that the market becomes stronger, and then goes to flat. Does this mean that after the sideways trend, the market will continue to grow? No. Maybe it transfers into a triangle, not into the flat? It, also, no.
You can check it out using historical data.
Predictions — are evil
Using the sideways trends, it’s important to rely only on fact of the breakthrough. You should make your own strategy if the sideways trend is pierced.
Sideways trend as a link between directional trends
Triangle is formed between two upward trends.
It’s easy to find it on short timeframes: 1-5 minutes timeframes. What has happened here?
Participants pushed the price up to the point where the market had reached the important resistance level. In this area, the price has started to fluctuate: in the new zone, market participants stop purchasing as active as before.
After some time, the buyers haven’t noticed any active actions from the sellers (any attempt to decrease the price), and again start to push the price up.
Sideways as a trend turning point
Flat as a turning point of a trend, instead of it, there could be a triangle.
The market becomes stronger, and once upon a time reaches the moment, when market participants start taking profits. They close the open positions. If they bought before, they start selling right now, the balance between buyers and sellers changes. The price starts to “punch” the invisible ceiling: it fluctuates in the same place, active movement slows down.
The enthusiasm of buyers may end. Then the trend will stop, and from the sideways trend the market will slide down. In such situation, the sideways trend will be a turning point.
The logic of the sideways trend forming does not depend on the timeframe: it works both on long and short timeframes.
Where do sideways exist?
Such formations often can be found in resistance levels during large timeframes.
For example, during the daily timeframe, the market is strengthening. Then sideways trends can be found on a weekly or monthly timeframe, inside or around resistance and support levels.
Similarly, if you monitor market changes on 1-hour or four-hour timeframes, you will see sideways trends in the resistance level area of a greater order: daily, weekly, or monthly.
Sideways and graphs
At what specific moment, during the market movement, can we say with confidence: “Yes, this is a sideways”.
It is important to be able to determine correctly this moment, because everything depends on it, what will be next.
What do we see in the picture above
The market moves up for a while, a resistance level (1) is formed, after that the market turns again: a support level is formed. Movement No. 1 and movement No. 2 do not yet allow us to make a decision that the market is moving in a sideways trend . These signals aren’t enough.
In the third movement (3) the price goes up to the resistance level and beats off from it. At this moment, you and I may suspect that the market will move to the sideways soon.
This will happen if the market continues to decline and beats off the support level.
Yay! Full flat
The new support level is equal to the previous one. Now we can make a conclusion that the market is moving in a sideways trend, the price corridor.
Let’s calculate how many market movements are needed (soaring or sliding down) to make sure that it is on the chart.
It’s not difficult to count, according to the picture “Yay! Full flat” we can see 4 of them, and this is the minimum.
According to the third movement, we still can not be sure that “this is the sideways”, because the market is just starting to touch the top level. Only due to the fact of the turn, we can assume that it will start soon.
At the end of the fourth movement, we are finally convinced that a side trend has formed on the market. The way we see it: the market beats off the previous support level, at least two bullish candlesticks are being formed. Price moves back to the “corridor” that we see. As this movement continues, we confirm our hypothesis.
Dangerous misleading info about the sideways trend, or why it is not worth trading for newbies
It may seem that it is pleasant to trade in the corridor: the highs, the lows are clearly visible, and the dynamics of the nearest movement seems predictable.
Mistake number 1: hope that the market will continue to fluctuate within the lines of the sideways.
Historical data shows a pattern: as a rule, the market breaks flat or a triangle on the fifth movement, less often on the fourth or sixth.
Once again: most often the market exits a flat or a triangle at the moment when we recognize the sideways trend. At this point, it is just coming to a logical conclusion.
Every rule has an exception but statistics is a stubborn thing. In the fourth and sixth movements, the market also exits a flat or a triangle, but such movements appear less frequently.
It is important to remember that the market can go up from the sideways with a 50% probability, and with the same probability go down. Newbies are often wrong with the predicting the price movement. Predictions may lead to emotional transactions, if the trader takes positions, focusing on the fact that the market “must” move in any direction.
Mistake number 2: enter at the low points, exit at the highs.
As a rule, newbies, meeting a sideways trend, follow a simple strategy: buy from support lines, sell from resistance lines (according to the graphs, entry and exit points are indicated by arrows):
We don’t like it too, but unfortunately this does not work too.
In reality, such a clear picture as a rule arises only on historical data, if you can rewind the graph back and say with certainty that you had to buy in the first arrow zone, in the second zone you had to sell. At that time period when this movement was forming, it was difficult to say for sure that it was flat. In the zone of the third arrow, in the final of the fourth movement, as a rule, it is possible to determine that this is really flat, to be true, it is ending. Even this, as practice shows, is possible for experienced traders.
What to do?
Newbies, during the sideways trends, need to trade carefully but it is better to wait.
- See the sideways trend
- Make your support and resistance levels
- See how their properties work.
- If the sideways lines are pierced, you should analyse the graphs, and according to the pic, you should make a decision to enter or not.
Let's return to our triangle on the chart:
Find extreme support and resistance levels.
The correct answer and further development:
The same schedule after some time
The resistance level, which we’ve seen on the previous pic, is highlighted here with a green line. The level was pierced by a small green candlestick that opened and closed above it. The fact of the breakthrough of the level of its first property was as a signal that the market will soar. Therefore, you should try to find the entry point in the bullish trend, to purchase.
Let’s analyse the second situation:
What do you see here aka is it possible to trade here?
We remind you that in order to answer this question, you need to determine trend direction: upward, downward or sideways.
Well, we have a triangle, again.
As you remember, you build inclined lines for clarity only: to see if there is a triangle on the market:
- We check the last interval,
- We find on it the highs and lows of market movement,
- We draw straight lines through them,
- We see that the lines aren’t collateral, that means that they’ll cross soon.
As long as the market is inside the triangle, we can’t trade.
The way it has ended:
The market pierced the resistance of the green candlestick, which followed the long green candlestick. Then the price was adjusted, but after that the trend continued to move with confidence on the second property level.
New schedule — the same question:
Can we trade right now?
By the way, the graph shows the daily timeframe, which means the triangle was formed for about a month.
This indicates uncertainty.
During long timeframes, it is the reason for the formation of sideways trends. The logic is that market participants do not want to act actively (buy or sell) because they do not see a clear picture of the future market movement. Instead of trading, they close positions and watch. Most of these situations are dictated by factors of fundamental analysis: events in the currency economy, or economic and political events around it.
What will happen next:
The triangle was pierced and the price was actively sliding down for the next few months.
Most often such situations are dictated by many factors. What do these three situations teach us?
That a signal of market direction is a breakthrough of the sideways trend.
What is important to remember:
- Sideways trends are market movements which reflect uncertainty. They show that market participants have mixed opinions about the dynamics of the coin price. The key idea of the sideways trend is to wait for an exit from it up or down.
- Sideways trends can be found on all timeframes, but more often on short timeframes, 1-5 minutes. These formations are often formed within or around the resistance support levels, for timeframes of a greater order: if the daily market is growing, on the weekly market it moves in flat.
- We’ll see that the market follows sideways trend only during the 4th or the 5th movement.
- According to statistics, the market pierces the sideways on the fifth movement, less often — on the 4th or 6th. This is not a hard rule: exceptions are regularly met, more than eight movements can be found, but we do not recommend you to wait for the 6th movement after the 5th one.
- Sideways never show the rout of the market after piercing it. The price may move upward or downward.
- The most interesting part starts after the market exits the sideways movement.
- The fact is that the sideways trend lines are pierced according to the properties of the support and resistance lines, indicating where the market actually goes.
- During the sideways trading, those who can take a glance at the chart, can notice that:
- is there any sense to trade or not to trade,
- which trend is on the market right now,
- where are support and resistance lines,
- which direction to choose for trading,
- the best entry point,
- the best volume for entering the market.
- Traders with lack of experience should not trade during the sideways trends and triangles. In practice, you’ll be able to identify the trend during the fifth wave, while the sideways comes to its logical conclusion.
- Any attempt to guess, as a rule, sooner or later ends in the same way as any prediction - merged funds.
- If you see the sideways on the the daily timeframe, you should find the support and resistance lines, and continue to act depending on their properties. After the breakthrough of the sideways, you start searching for opportunities to enter.
A few words about predictions:
If you make your own strategy based on predictions, not facts, so, maybe you should think about less risky ways of using your prophet skills?
Trading works in a different way: you need to develop a strict plan, where all ways of market behaviour are recorded.
As you remember, you should start developing your trading plan from description of the situation, when you should enter the market or not. So, you should make a record, that if the market moves sideways on the daily timeframe, it is not a trading situation for you.
In fact, the forecast indicators also exist in the lateral movement. We’ll discuss it next time, so stay tuned.
Practice, find these formations on historical data and in the real market, and you don’t need to go somewhere else, just follow 3commas.