What Is a Sideways Market?
A sideways market, or sideways drift, occurs where the price of a security trades within a fairly stable range without forming any distinct trends over some period of time. Price action instead oscillates in a horizontal range or channel, with neither the bulls or bears taking control of prices.
The opposite of a sideways market is a trending market.
- A sideways market, sometimes called sideways drift, refers to when asset prices fluctuate within a tight range for an extended period of time without trending one way or the other.
- Sideways markets are typically described by regions of price support and resistance within which the price oscillates.
- Trading a sideways market can be tricky, but certain options strategy maximize their payoff in such situations.
Example of a Sideways Market
The Basics of a Sideways Market
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. For instance, you could sell a straddle—both an at-the-money call and a put option for the same underlying asset in the same strike and same expiration month. As the options' expiration date approaches, the option premiums are eroded by time decay—and ultimately if the market remains sideways will decay to zero.
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 seek 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.)