What To do When Markets Trade Sideways Markets don't neces | Money Planet
What To do When Markets Trade Sideways
Markets don't necessarily have clear trends all the time. Sometimes, even for long periods of time, assets may trade sideways. Investors that like to follow their investments constantly can find this aspect very frustrating.
However, what we should understand, is that markets are very irrational in the short run. It is only after long periods that they have adjustments to reflect new information.
Most movements are just noise. Especially in the short run. The idea here is that "the long-run" is never actually reached. It is the clear sharp movements, those of a handful of days, that really matter.
Making Money When there is no Clear Trend
Investors can exploit a sideways market by anticipating breakouts, either above or below the trading range or by attempting to profit as the price moves between support and resistance within a range.
Many traders focus on identifying horizontal price channels. They may try to buy the asset when the price is close to support levels and sell when the price is close to resistance levels.
However, bear in mind the risk of trading this way. Frequent operations generate commissions that harm a trader’s profits. Investors who employ this type of strategy do not have the advantage of letting their profits run in either direction.
Moreover, frequent buying and selling looking for profits in a sideways market are time-consuming.
Patience is Key in Sideways Markets
Although the best investors understand the significance of patience, it is a difficult skill to learn. Consider how closely you may follow your first investments even when the amount is low.
If you let emotions rule you, it can often lead to disappointing returns. Impatient investors who violate their discipline may be starting down the path to blowing their accounts.
Patient investing is similar to fishing. There are lots of fish in the sea and it isn't necessary to catch them all to be successful. In fact, it's only necessary to catch only a few to be successful. When a market is trading sideways, that point is a breakout.
A breakout happens when the price of an asset moves above a resistance, or moves below a support. Breakouts indicate strong potential for the price to start trending in the breakout direction.
Breakouts are commonly associated with chart patterns like triangles, flags, or wedges. Even after a high volume breakout, the price might retrace to the breakout point before moving in the breakout direction again. Why? Because short-term traders will often buy the initial breakout, but then attempt to sell quite quickly for a profit.
Here we have a clear breakout pattern in the CAD/USD pair. The best way to trade a break-out is to look for those relatively long trends that end with a breakout and then place a stop-loss near the breakout point as a stop-loss.
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