What it means
Most people picture markets as going up or down, but much of the time prices simply drift in a band. The top of the band, where selling tends to appear, is called resistance, and the bottom, where buying tends to appear, is called support.
As long as the price bounces between the two, the trend is sideways. A sideways trend suggests that investors disagree about value or are waiting for news.
New information, such as an earnings report or a central bank decision, can end the pause. When the price moves outside the range with strong trading volume, it is called a breakout, and a new trend may begin.
Different people use sideways markets differently. Range traders buy near support and sell near resistance, earning small gains from the bounces.
Trend followers stay out, since their strategies need clear direction and tend to lose money in choppy conditions. For businesses, a sideways market affects planning.
A company holding foreign currency may find that exchange rates have stayed in a band for months, making budgeting easier. An investor in a sideways stock market may earn mostly from dividends rather than price gains.
The main risk is mistaking the pause for a permanent state. Ranges can last weeks or years, but they do end, and the breakout can go either way.
Setting stop losses just outside the range helps limit the damage if the market breaks the wrong way. Volume gives useful clues inside a range.
Falling volume often means interest is fading and a larger move is building, while a surge in volume at the edge of the range suggests the next move is close. Traders also use measures of volatility, such as the average true range, to confirm that price swings are staying small.
In practice
Real-world examples.
Example
A retail chain's shares have traded between $18 and $20 for five months. An investor holds them mainly for the dividend of 4% a year. He ignores the day-to-day bounces and waits for results that might change the picture.
Example
A treasurer for an importer sees the dollar-euro rate stay within a narrow band for a full quarter. She decides to buy the next month's euro payment in two instalments, one at each end of the band. Her average cost is lower than it would have been had she bought in one go.
Example
A technical analyst at a brokerage writes that a commodity has traded sideways for eight months and that a breakout is likely. She advises clients to set alerts above and below the range. When the price jumps above, they act quickly, having already decided how much to buy and where to place a stop loss.
Formula
Calculation
Range width (%) = (resistance level - support level) / support level x 100
Suppose a stock has bounced between a support level of $50 and a resistance level of $55 for three months. The range width is (55 - 50) / 50 = 5 / 50 = 0.10, which is 10%. A range trader buying at $50.50 and selling at $54.50 would make $4.00 per share, which is 4.00 / 50.50 = about 7.9% on the purchase price, before costs.Case study
Seen in the real world.
Stonebridge Dairy is an illustrative, fictional listed company whose share price spent a full year between $24 and $27. The chief executive grew frustrated, believing the market was ignoring improvements in the business.
The finance director explained that a sideways trend often reflects uncertainty rather than disbelief. She noted that earnings had been steady, so there was no news to push the price in either direction, and that regular investor updates could help shift sentiment. She also pointed out that the dividend yield of about 3% meant shareholders were being paid to wait.
After the company published a new cost-saving plan and raised its dividend, the shares moved above $27 on heavy volume. The illustrative lesson is that a sideways market can be ended by clear information, and managers who communicate well can help it along.
Watch out
Common mistakes.
- Assuming a sideways market is safe, when a breakout can be sudden and sharp in either direction.
- Using trend-following strategies in a range, which tends to generate many small losses.
- Treating every touch of support or resistance as a guaranteed bounce, when the level may fail at any time.
Questions
People also ask.
How long can a sideways trend last?
It can last days, months or even years, and there is no fixed length.
How do you know when a sideways trend has ended?
A close outside the range, ideally on high trading volume, is the usual signal, though false breakouts do happen.
What kinds of investments suit a sideways market?
Income-focused holdings, such as dividend shares and bonds, and range-trading strategies often do better than pure growth bets.
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