On Market types and the Tools of the Trade III, we will talk about Sideways markets.
Sideways channels
A sideways channel happens when the price oscillates between two levels that seldom move or move up or down very slowly. If the channel is wide enough, it may offer trading opportunities. although usually, volatility is higher, therefore harder to trade.
Fig 3 shows a sideways channel that took place in the EURGBP from Nov. 2016 till Jun. 2017. Here, we observe there’s a floor level and a ceiling level, where bounces occur. In this sideways channel, we could split every leg and consider each leg as a bull or bear trend, go to a shorter time frame and trade it.
But not always this may be possible. Fig 2 shows the price behaviour on USD/CHF pair for the last 5 months, from the end of may, 2017, till the beginning of October. We may observe that the high volatility that takes place in the last two legs, make it difficult to differentiate impulsive from corrective. There, we must switch to a shorter time frame in search for better behaved impulsive patterns.
A final word about time frames. We should use a higher order time frame as our guide to decide which side to trade in the shorter frame, then mark support and resistance levels and potential entry points and stops, to assess the reward and its risk.
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