Now that we already covered The Trending Market it is time to discuss another type of market or more specifically the sideways market. A sideways market is one that has no direction and is range bound. This type of market lacks strength and seems to be heading nowhere while constantly zigzagging in the already established range. One of the dangers of such market is that traders can potentially keep getting stopped out of positions while waiting for a long-term big move to occur in this choppy trading environment.
A sideways market fails to make new highs or new lows and is characterized by decreased volumes. This in turn opens the door for market manipulation by large institutions or high frequency algorithmic trading enterprises. Sideways markets are extremely dangerous for trend followers because these markets lack the strength to establish a new trend or continue an existing one.
One way to identify a sideways market is to plot a 50 and 200 day simple moving average and see if the lines of the indicators are flattening. If they are and you can clearly distinguish a range in which the prices have been trading for a while, chances are you are in a sideways market.
The 8 month sideways market of AKS between December 2010 and July 2011.
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