A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal.
In a sideways trend, the price moves in a narrow band, neither going upward nor downward.
This typically occurs during a period of consolidation before the price continues a prior trend (trend continuation) or reverses into a new trend (trend reversal).
A sideways price trend is also commonly known as a “horizontal trend” or “range-bound“.
Since there is no clear directional trend, sideways trends can be very frustrating for short-term traders and trend traders.
It may occasionally rise above or below those levels, but it doesn’t follow through with an even higher high or lower low.
Before continuing its prior trend or starting a new trend, it’s not uncommon for the price to remain in a horizontal trend for a prolonged period of time.
How to Trade a Sideways Trend
Traders focus on identifying a horizontal trend channel that contains a sideways trend.
Then they can look for confirmations of a breakout or breakdown.
- If price can breach its upper trend line. traders can buy the breakout.
- If price can breach its lower trend line, traders can sell the breakdown.
Traders can also look to trade the “bounce“.
If the price has regularly rebounded from support and resistance levels:
- When the price is nearing a support level, buy.
- When the price is nearing a resistance level, sell.
The Psychology of a Sideways Trend
When the price gets stuck in a sideways trend, market psychology goes through several basic stages.
Initially, traders expect the price to quickly break out of the newly formed range.
When this fails to happen, sentiment turns bearish as price drops to the lower boundary of the range.
As price continues bouncing from the top to the bottom of the range. traders begin to lose interest and eventually quit participating altogether with many selling stock positions.
This is what forms the basis of a bullish accumulation pattern as institutional traders “accumulate” the supply from disgruntled retail traders.
As the range continues, many smaller traders are still frustrated at the lack of directional movement.
As supply slowly decreases due to accumulation from institutional traders, price rises back towards its upper range.
As the upper range is reached, traders become apprehensive.
They’ve long been conditioned to seeing price rally to the former price highs, only to fall back and fail to pierce through the upper trading range boundary.
Skepticism has been thoroughly established at this point and scarcely anyone believes that the market will break free from the confines of its upper limit.
When prices reach the upper band of the range, participation even among active traders tends to be weak.
Few traders are interested in buying near a trading range ceiling.
Only when a decisive breakout is made above the ceiling do traders begin to show any interest.