Sideways is not a direction I am particularly fond of. You can’t make money, and for those unable to distinguish the characteristics of “sideways” – you can also lose money – very fast.
Traders dream of mounting profits – with day after day followed by yet another tall green candle, with trend so clearly in place that a five-year old could trade it effectively. This is rarely the case. Where as – we are most often faced with ambiguity, trendless markets, ranging stocks or currency pairs and a general sense of confusion as to “where the market is going next”. In fact, they say that markets are generally only trending 30% of the time – and that the remainder of time is spent grinding traders accounts to dust in the dreaded direction of….you guessed it – “sideways”.
Lets look at a quick example.
In the example above – clearly no trend is in place – and a trader is left struggling for days, looking for a definitive sense of direction. This (more often than not) pushes a trader to do things such as:
- Dump the position at a loss (even though – it’s just as likely that the direction will eventually turn in your favor).
- Add to the position (creating even more exposure and risk) with thoughts that the small dips or bumps are buying or selling opportunities.
- Hold the position – but with considerable stress – with funds now tied up (day after day) and no profits to speak of.
For the inexperienced “sideways” is almost certain to cause significant emotional pain, and even more so – pain to their account balance. I do my absolute best to avoid this at all costs but still – with years of experience, have learned to accept it as a part of trading, and that is virtually impossible to avoid 100%.
Patience is the key – as making decisions during times of “sideways” will almost certainly take its toll on both your account….and your emotions.
Mastering Sideways Markets: Advanced Strategies for Range-Bound Trading
The brutal reality of sideways markets extends far beyond simple frustration. When major currency pairs like EUR/USD or GBP/JPY enter consolidation phases, they create what I call “liquidity traps” – zones where retail traders get picked off systematically by institutional players who understand range dynamics. The smart money knows exactly how to exploit these periods, using them to accumulate positions while retail traders bleed out through poor timing and emotional decision-making.
Consider the typical scenario: USD/JPY has been trading in a 200-pip range for three weeks. Every bounce off support looks like a buying opportunity, every rejection at resistance screams “short.” But here’s what most traders miss – the institutions are playing both sides, collecting premium from retail stop losses while building their core positions for the eventual breakout. They’re not trying to pick the direction; they’re farming the range.
The Psychology Trap That Destroys Accounts
Sideways action triggers every psychological weakness traders possess. The need for action becomes overwhelming. You see EUR/GBP chopping between 0.8450 and 0.8520 for two weeks, and suddenly every 20-pip move looks like the start of something bigger. This is where accounts die – death by a thousand cuts.
The worst part? Sideways markets often precede the most explosive moves. That three-week consolidation in AUD/USD suddenly explodes 300 pips in twelve hours when the RBA shifts policy stance. But by then, most traders have either been stopped out multiple times or are so shell-shocked they miss the real move entirely. The market rewards patience during these periods, but patience is exactly what gets eroded by the constant false signals and whipsaws.
Professional traders understand this dynamic. They reduce position sizes during consolidation phases, widen stops, and most importantly – they stop trying to force profits from every market wiggle. The amateur sees a flat market as opportunity lost; the professional sees it as the market’s way of setting up the next major directional move.
Identifying Range-Bound Conditions Before They Hurt You
Recognition is your first line of defense. True sideways markets have specific characteristics that separate them from temporary pullbacks in trending conditions. Look for overlapping price action where recent highs fail to exceed previous highs by meaningful margins, and recent lows hold above previous support levels. When GBP/USD is making lower highs but higher lows over a compressed range, you’re looking at consolidation, not trend continuation.
Volume patterns tell the story institutions don’t want you to see. In genuine sideways markets, volume tends to diminish as the range persists. This indicates a lack of conviction from major players – they’re waiting for fundamental catalysts just like you are. However, if you see volume spikes at range boundaries without follow-through, that’s institutional accumulation or distribution masquerading as range-bound price action.
The key technical indicator most traders ignore during sideways action is the Average True Range (ATR). When ATR contracts significantly over multiple timeframes, it signals the market is coiling for a significant move. Smart traders use this information to prepare for breakouts rather than trying to scalp the diminishing ranges.
Positioning Strategies That Actually Work
The conventional wisdom about trading ranges – buy support, sell resistance – is retail trader suicide. By the time those levels are obvious, they’re already compromised. Instead, focus on positioning for the eventual break rather than trying to profit from the range itself.
This means using sideways periods for preparation, not profit generation. Reduce overall exposure, tighten risk management, and identify key levels that will signal the end of consolidation. When USD/CAD has been range-bound ahead of Bank of Canada meetings, the smart play isn’t trying to scalp 30-pip moves – it’s positioning for the 150-pip gap that occurs when policy surprises hit a compressed market.
The most effective approach involves patience-based position building. Instead of trying to time perfect entries during the chop, use the range to accumulate positions at favorable levels with the understanding that profits will come from the eventual directional move, not the consolidation itself. This requires accepting that capital will be tied up, but it eliminates the emotional destruction that comes from fighting sideways action with short-term tactics.
I will look for higher dollar next whole week until Friday the 7th. Target 81.6, higher high than 16th Nov.
This will be the preview of a strong move upward after January end and after earnings.
I know you’re only anticipating dead cat bounce. I think it will be perceived as such in the beginning of the week but not on Friday.
Nice work!
I don’t claim to nail these things down to a given 24 hour period – as this is impossible. We are on the exact same page as far as dollar movement goes in coming days. Fantastic.
With my trading it won’t matter if its a day or week – but more importantly that the general direction is correct and that hopefully – the dreaded “sidways” action has ended. I feel pretty confident getting short the dollar here right this second really – in that I am committed to the trade and would have stops so wide – it would take a full blown market crash to touch them.
Sounds like you are right on track – I appreciate hearing your thoughts/direction.
81.60 is nothin with respect to my stops / risk tolerance here at this significant turn. I will catch it one way or another – and you too!
Great trades mate! I hope to be on the right side on this one and getting confirmation from you is really encouraging. Wide stops way to go if you’re confident in your analysis. That’s how I like it too, don’t like to get stopped and getting caught in whip saws…Good luck!
tfinavia, I am really new to this but this chart has me perplexed as to the significance of 81.60 for the DXY.
To me I see the ‘dead cat bounce ‘ on the stochastic, the Macd heading to the zero line and four attempts this week to head south of 80.
With all do respect I will appreciate your thoughts
Graham and everyone.
If you are new to this – let me put a couple lil things to rest right away. A stochastic and/or a Macd will provide you with very little information (tradable signals) as they are “lagging indictors”. Great for general reference but in my view – nothing I use to trade.
The specific price levels where a given asset may hit support or resistance are recognized by drawing horizontal lines on your charts through areas of congestion. So……back out and look at a 1h chart for like……a couple weeks….and start drawing horizontal lines where ever you see areas of “squiggle” – I use a crayon…..not a laster pointer.
For this example of $dxy….(and you are gonna love this) – pull a weekly chart – then draw a line at 81.50 – 81.70 – then get back to me with what you see.
Awesome…….glad you recognize where I am in the curve.
looking at this weekly chart I see: http://www.forexpros.com/quotes/us-dollar-index-streaming-chart
I see; Higher highs and higher lows
head/ shoulders pattern
lots of congestion at 80.20
ooops…..first time posting a grpahic here….it looks to big.
can you see it this way?…..enter this in your browswer.
http://forexkong.files.wordpress.com/2012/11/dxy_2012-11-29_1931.png?w=900
Thanks Kong, so we are seeing a breach of the lower channel line.
I wonder if there is enough momentum to take it under that 80 resistance level.
I really dont like just sittin in cash – as I need to keep active in order to keep funds rolling in….but – here I sit.
This now being friday, there is no sense entering the markets – likely not til Tues afternoon currency wise so….I’ll be getting outside and likely outta town for the weekend. I am hoping to see a lil pop in the buck for the best entry short but with such weakness – will likely be pulling the trigger early next week one way or another.
We will be going much lower than that 80 level….just not today!
Thank you for your thoughts. Enjoy that weather down there. We are entertaining snowflakes here in Ottawa.
Was hoping to take you up on accommodation suggestions there later on in the winter season however just took on a new project that will keep me tied up till spring.
Would still like to discuss sometime but perhaps you would rather an email discussion rather than on this board.
Cheers
Kong already replied your question. My thoughts are the same in that I don’t like to use lagging indicators in anticipation of a coming move. I like to see resistance and support levels combined with general sentiment on Dollar. Being a contrarian on at sentiment extremes or at turning points has high chances of nailing the move and this is accomplished thru experience in trading months over months. COT data helps too just like it helped me tremendously nailing 4-6 weeks of strength in Dollar after Sept 17 this year. Good luck to you!
Go go go here.
I firmly expect anyone who’s gearing up (through whatever asset class) to get short the buck – should do very well in coming weeks.
Keep it coming as all input / suggestions are welcome. And with trading in general – there really are no silly questions!
The learning never, NEVER stops.
sorry forgot the link
http://stockcharts.com/c-sc/sc?s=$USD&p=D&yr=1&mn=0&dy=0&i=t63710148078&r=1354234501001
Reblogged this on Forex Trading with Kong and commented:
I wanted to re post this article on “patience” as it comes to mind often in my trading. At times when you may be frustrated or confused about market direction – it’s often a good idea to just step back and consider “patience…..patience….patience”.
Have a good weekend everyone.