DEFINITION of Sideways Market / Sideways Drift
A sideways market or sideways drift occurs where the price of a security trades within a range without forming any distinct trends. Price action oscillates in a horizontal range or channel, with neither the bulls or bears taking control of prices.
Example of a Sideways Market
BREAKING DOWN Sideways Market / Sideways Drift
Market participants can exploit a sideways market by anticipating breakouts, either above or below the trading range or by attempting to profit as price moves between support and resistance within the sideways drift. Traders who use a range-bound strategy should make sure the sideways market is wide enough to set a risk-reward ratio of at least 2:1 -- this means that for every dollar risked, investors make two dollars of profit.
Sideways markets also get referred to as choppy or non-trending markets. If the sideways drift is expected to remain for an extended period, investors can profit by selling call and put options with approaching expiration dates. The opposite of a sideways market is a trending market.
Benefits of Trading a Sideways Market
Clear Entries and Exits: A sideways market usually has clearly defined support and resistance levels, which removes ambiguity about where to place entries and exits. For example, a trader can buy a security when it’s price tests support and set a profit target at resistance. A stop-loss order placed slightly below the sideways market’s support level minimizes the trade's downside.
Risk and Control: Traders chase smaller profits when trading a sideways market; therefore, each trade is typically not open for more than a few days or weeks. This reduces the chance of a position being adversely affected by a bear market or unexpected news event, such as a terror incident. Trading in a sideways market allows traders to close any open positions before company announcements, such as earnings reports, and re-enter when the security’s price returns to support.
Limitations of Trading a Sideways Market
Higher Transaction Costs: Trading a sideways market typically presents more trading opportunities than trading a trend. As a security's price moves within a range, traders can continually buy at support and sell at resistance. Frequent trading generates commissions that eat into a trader’s profits. Traders who employ range-bound strategies do not have the advantage of letting their profits run to offset commission charges.
Time Consuming: Frequently buying and selling a security to eek out a profit in a sideways market is time-consuming. Traders need to determine their entry and exit as well as place a stop-loss order. After entering a trade, it has to be carefully monitored to ensure correct execution. Many traders have automated their trading strategies to avoid having to sit in front of their monitors all day. (For more, see: The Pros and Cons of Automated Trading Systems.)