What is a Sideways Trend?
A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal. This typically occurs during a period of consolidation before the price continues a prior trend or reverses into a new trend.
A sideways price trend is also commonly known as a "horizontal trend."
- A sideways trend is the horizontal price movement of a stock between resistance and support levels that occurs when the forces of supply and demand are balanced.
- 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.
Basics of Sideways Trend
Sideways trends are generally the result of a price traveling between strong levels of support and resistance. 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. These periods of consolidation are often needed during prolonged trends, as it is nearly impossible for such large price moves to sustain themselves over the longer term.
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 their 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 price 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 downtrend, that has lasted several months.
In this case, traders may interpret the downward slope of the 200-day moving average as indicating a long-term downtrend, while the sideways 50-day moving average suggests that the intermediate term trend is sideways. These trends could indicate that the stock is consolidating before resuming its downward trend or perhaps preparing to reverse into a bullish trend.