Whether it is the stock market or crypto market, there are three major types of trends, which are uptrend, downtrend and sideways trend. The uptrend comprises ascending peaks and troughs or higher highs and higher lows, whereas, the downtrend is made of descending peaks and troughs or lower lows and lower highs.
In this guide, we will learn about the sideways market in detail. If you know what a sideways market is, its limitations and what you should look out for then crypto trading can be a less intimidating and stressful venture.
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What is Sideways Market?
A sideways market is also called sideways drift and occurs when the price of a cryptocurrency moves between strong levels of support and resistance for a long period without trending one way or another. The market is also considered stagnant to some extent and can make it difficult for traders to navigate through it.
Neither the bulls nor the bears have any influence when the price of an asset moves within a horizontal range without breaking that pattern. It also occurs when the supply and demand are almost equal for an extended period.
Such market conditions can usually be seen during a period of consolidation before the price of the asset either continues a previous trend or starts moving into a new one. Periods of consolidation are sometimes necessary to occur during prolonged trends as it is almost impossible for the major price moves to remain maintained over a long period.
This is what a sideways market looks like.
One of the most important trading indicators is volume. During a sideways market, the volume remains flat because it is equal between the buyers and sellers. If a breakout (price goes up) or breakdown (price goes down) is expected then the price moves sharply in either direction.
Now since the price of a crypto asset is moving in a horizontal range it can be difficult and even risky to place a trade, especially for inexperienced traders.
What to Avoid in a Sideways Market?
As mentioned above, the price always bounces between support and resistance levels. When there is a break from either direction traders usually close inside the range again, but they can also lose their positions if they are unfamiliar with the market structure. Therefore, one should avoid trading in a sideways market without understanding the market structure first.
You can learn more about market structure through our video below.
In a sideways market, experienced traders usually sell from the resistance back down to the support or buy from the support to the resistance again.
However, it is also crucial to know that sometimes the price does not reach the support or resistance levels and only makes it halfway through, which is called a choppy market.
What are the Benefits of Trading a Sideways Market?
There are a few benefits of trading in a sideways market, but they still do not guarantee a good trading experience if the traders lack prior trading experience or relevant information.
Some benefits of trading in such market conditions are mentioned below.
Control and Risk
Traders who trade a sideways market often look for smaller profits. Therefore, the trades do not remain open for more than a few days or weeks. This also reduces the chances of the trades being negatively impacted by unfavorable news events or a bear market.
A sideways market also offers the opportunity to traders to close any open positions before any new announcements are made and then open them again when the conditions become more favorable.
Clear Exit and Entry Points
The movement of an asset’s price between very strong support and resistance levels makes entry and exit points for trading positions quite clear for the traders.
Traders purchase a digital asset after testing its price at the support level. They can then set a profit target at resistance. If the traders place a stop-loss order slightly below the support level, then it minimizes the drawbacks in case the trade does not go well.
Limitations of a Sideways Market
Understanding the limitations of a sideways market is crucial, especially for inexperienced traders. This can help you get a good idea of what will work and what won’t. The clearer your trading plan is, the fewer complications you would have to endure as a trader.
Crypto trading, generally, requires the trades to be very careful and patient. Decisions regarding trading should never be made emotionally or in a hurry.
Trading a sideways market requires even more patience as there is not a lot of movement noted for an asset. Even though the entry and exit points appear clear, one needs to place a stop-loss order and consider several other aspects.
Constantly buying and selling a crypto asset to get profits can be time-consuming. Once a trade has been placed traders need to carefully monitor it to ensure that the order execution is done at the right time. Traders also opt to automate their trading strategies, so they don’t have to spend a lot of time manually monitoring the markets.
Higher Cost of Transactions
Contrary to common belief, a sideways market offers more opportunities to trade as compared to a market with definitive trends. However, trading frequently in these market conditions can result in commissions that can take a big chunk out of the trader’s profits.
Trading, in general, is quite a difficult and risky venture, which is maximized in a sideways market. However, knowing what a sideways market is and other relevant details such as its limitations and benefits can somewhat reduce the challenges one may face. The details mentioned above can play a key role in helping new crypto traders understand the crypto market.
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