Every trader worth his salt knows that the hardest market to trade and make profit on is a non-trending market. It is a market that is range bound where the prices move sideways going up and down a tight, narrow range. It is the perpetual trap for traders old and new, experienced and newbie. It locks them up and tests their patience and resolve seemingly asking them to give up before any breakout occurs.
Before we answer the question of how to trade such a market, we should first answer the question of should we or shouldn’t we trade this kind of market. There are two schools of thought as far as the subject is concerned. There are those who think we shouldn’t, even giving us an advice to just stay on the sidelines and observe until the market gives a clearer indication of where it is headed. These traders are essentially the trend followers. Then there are those who say we should since the price range is more predictable and profits can be had no matter how small they may be.
However, before we answer any of these questions, we need to understand first why the market goes sideways. This way, we can be sure that whatever action we take will be with the right perspective.
A non-trending market or a range bound market is an indication of indecisiveness on the part of the traders. They are mostly sidelined because of the absence of fresh fundamentals that will encourage them to establish new positions. It could be because they feel that the previous fundamentals that made them drive the market to where it is currently holding ground have been totally discounted by the recent price movement. Or, they may feel that they have overbought or oversold the market to where it is now and a correction is in order.
The bottom line is it has become a wait-and-see game for the major players. They take this time to re-assess the market fundamentals ready to start building their positions even before fresh fundamentals hit the newswires. Depending on the weight or possible impact of the anticipated fundamentals, a sideways moving market can be likened to a coiled spring that is gathering force. The longer the sideways movement takes, the larger you can expect the breakout to be.
Now to answer the question – by all means you should trade this market otherwise why are in the business of risk taking? There are two reasons why you should trade a sideways moving market.
First is to scalp for profits here and there if the range is wide enough to make some decent profit. The trading parameters are much clearer. The upper and lower limits of the trading range are evident enough for you to buy at the approach of the bottom limit and sell at the approach of the upper limit. The cut loss points are clearer too. If you buy, you can make the break of the lower limit (+/- 10 pips) as your cut loss point and vice versa.
The second reason is to take advantage of a possible correction and to establish your position in the most vantage point in anticipation of a big move. If you wait for the market to make that big move you may miss the boat altogether and by the time you decide to make a move the market may now be ready to go in the opposite direction. So, how do you do all these things? Simple, take your cue from the pivot points. This tool will help you determine where the possible resistance and support lines are.
Author of the Article is Zahir Shah, from Admiral Markets.