Sideways market types cause anxiety amongst trigger happy traders.
After all, we are trading FX for the volatility right? And when there is none… it’s just not fun.
But if you’re the patient type – one who likes to stalk the market like a hunter – sideways market types can offer some of the best risk/reward ratio trades.
In sideways markets, there are two main strategies you can apply when trading spot forex.
- Trading the edge for breakout failures
- Awaiting a breakout
There is a third alternative – one that might actually be the best approach for many traders – sit it out and wait for the trend to develop.
Don’t chop your account up
One of the most important advantages you have as a retail trader is that you don’t have to trade. As retail traders, we are blessed in that we wait to pick and choose our trades. In contrast, money managers and market makers may be obliged to be in the market, even when they really don’t want to be.
If the market type does not suit your trading strategy, switch it off. The last thing you want to do is chop up your account by trading the wrong strategy for a sideways market type.
Trade the edges
There are three different types of sideways markets: Quiet, normal and volatile.
In normal and volatile market types, an effective approach can be to go to a lower timeframe and look to trade reversals off the edges.
A good example of this is the USDCAD, which we identified as a sideways volatile market type.
If you go down to the 4-hour chart, you can see that there are a few opportunities for trades that revert back into the range
Stalk the breakout
One of the beautiful things about the Forex market is that is expands and contracts between periods of volatility and quiet. When these expansions occur, they can generate large R-multiple trades.
The best breakouts generally occur after a sideways quiet market type. The market type is relatively rare on the higher timeframes, which perhaps makes it all that much more potent.
You can see a sideways quiet market type developing on the EURUSD here.
In this market type, it is dangerous to place a trade in anticipation of the breakout happening. It is perhaps better to be ready to enter on the breakout, and then to scale in with additional positions as the breakout continues. If the breakout fails, then get out quickly.
Note that if you want to trade the breakout, you should be prepared to take some hits. Often enough the breakout will fail, so be sure to conserve your capital.
How do you know when the sideways market is going to end?
It can be difficult to tell if the price is simply spiking though the edge of the range, only to reverse, or if the breakout trade is now on.
To help answer this question, look for a catalyst. Is there some market moving news that likely means a new trend is about to begin? If not, then the chances of this being the actual breakout are diminished, and you might want to trade it with a smaller position size, look for a reversal, or avoid trading it altogether.
“I’ll have a breakout with that reversal please”
If you have a directional view about the currency pair (as opposed to looking to trade breakouts in either direction), you can look to combine both of the above approaches to build a position.
For example: if you are short the AUDUSD, you could take a short trade off the edge and, if it does break out short, you can then add more.
Having an approach for trading sideways market types is critical for the discretionary trader.
If you look to trade a sideways market the same way you do a trend, your account is in for a nasty shock.
Take the time now to note down in your trading plan how you will trade sideways market types.
And, as ever, make sure you have the discipline to be patient and execute your plan.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.