Sideways markets are often one of the most confusing and detrimental phases for traders, especially those who rely on trend-following strategies. In this phase, prices do not show a clear direction and tend to move in a narrow range, going up and down without a consistent pattern. While uptrend and downtrend phases tend to be easier to identify and follow, sideways markets present their own challenges that cause many traders to lose money.
In this article, we will discuss in depth why the majority of traders, especially those using trend-following strategies, often experience losses in sideways moving markets and how this phenomenon can lead to confusion, huge losses, and unexpected volatility.
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1. Sideways Phase: Market Without Clear Direction
Sideways market occurs when the asset price fluctuates within a narrow range and does not show a clear trend movement up (uptrend) or down (downtrend). In such conditions, prices often move back and forth between support and resistance levels without any definite direction.
Traders who are used to strong trends (either uptrends or downtrends) tend to get frustrated because every time they open a position, the price often reverses before reaching the profit target. As a result, losses pile up because stop-losses are often hit sooner than expected.
Features of Sideways Market:
- Limited Price Range: Price moves within a narrow range, moving up and down between support and resistance levels.
- Inconsistent Volatility: Price movements become more random, erratic, and can reverse direction quickly.
- Decreasing Trading Volume: The market often shows low trading volume, indicating a lack of interest or strength from market participants to push prices in a certain direction.
- False Breakout Signals: There are many fake pumps and fake dumps, where the price looks as if it is going to breakout, but then reverses direction quickly.
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2. Why Do Traders Lose Money in Sideways Phase?
There are several main reasons why the sideways phase is the most dangerous and detrimental phase for traders, especially those who use a trend-following strategy or follow market trends. Here are some reasons why this happens:
A. False Signals
In the sideways phase, many traders are fooled by false signals that make them believe that the market is moving in a new trend. A classic example is when the price suddenly rises or falls sharply, looking like a breakout (penetration of a key level), but then the price reverses direction quickly. These false signals often lead traders to enter positions at the top or bottom of the movement, which ends in losses.
- Fake Pump: A sharp rise in price, making long buyers think that an uptrend has started, but then the price reverses down quickly.
- Fake Dump: A sharp price drop, prompting short sellers to enter the market, but the price quickly rises again, trapping them in a losing position.
B. Rapid Changes in Market Direction
In a sideways phase, the market can change direction every few days, even hours. This makes it difficult for traders to make the right decisions because the price keeps reversing from support to resistance levels without any clear momentum.
Many traders open positions based on a short-term trend that appears to be developing, only to find that the market changes direction in a short period of time. In these conditions, stop-losses are often hit sooner than expected, resulting in small but consistent losses that eventually add up to large losses.
C. No Clear Trend to Follow
The follow the trend strategy works well in trending markets, whether they are uptrends (bullish) or downtrends (bearish). However, in a sideways market, there is no clear trend to follow. Prices move in zigzag patterns that leave trend-following traders confused and disoriented.
When prices are not moving in a stable trend, technical indicators such as moving averages or MACD also become less effective. Traders who usually rely on these indicators to mark the trend direction often get inaccurate signals in sideways conditions.
D. Increased Transaction Fees
In a sideways phase, because the price often changes direction within a narrow range, traders may make more transactions than usual. Every time a trader enters and exits the market, there is a transaction cost to be paid (spread or commission). When traders are constantly opening and closing positions in an attempt to catch small price movements, these transaction costs can add up and erode their capital, even if the losses per trade are small.
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3. Impact of Sideways Phase on Futures Traders
Traders who use futures are at higher risk during sideways phases due to high leverage. Leverage magnifies potential profits, but it also magnifies losses. In sideways phases, prices often move unpredictably, making leveraged positions more vulnerable to margin calls or liquidation.
Additionally, because prices frequently reverse direction, futures traders may find that their positions are liquidated more quickly than anticipated, resulting in large losses that are difficult to recover.
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4. How to Overcome Challenges in Sideways Market?
While sideways phases can be challenging, there are several strategies that can help traders survive and even profit from these market conditions.
A. Using Range Trading Strategy
Instead of following the trend, the range trading strategy is more suitable for sideways markets. Traders can identify clear support and resistance levels, then buy at support and sell at resistance. The goal is to profit from the price movement back and forth within the range.
B. Using Volatility Indicators
Indicators such as Bollinger Bands can help traders recognize when price is touching the upper or lower limits of a sideways range. When price reaches the upper or lower limits, traders can anticipate a reversal and take appropriate positions.
C. Reducing Leverage
In sideways conditions, it is wise to reduce leverage or even avoid it. High leverage can be very risky in volatile market conditions and can accelerate trader losses. With lower leverage, traders can better manage risk.
D. Implementing a Strict Stop-Loss
Risk management is key in a sideways market. Traders should use tight stop-losses to limit losses in situations where the market reverses quickly. Stop-losses allow traders to exit losing positions before losses become larger.
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Conclusion
The sideways phase is a challenging period for traders, especially those who rely on trend-following strategies. The market is moving without a clear direction, the price movements are back and forth, and the frequent false signals make this phase one of the most detrimental. Traders need to understand the risks involved, adjust their strategies, and avoid overtrading in these uncertain conditions.
By using a range trading strategy, reducing leverage, and maintaining discipline with stop-losses, traders can minimize losses and even profit in this challenging sideways market.
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