Sideways markets

Going nowhere

Not every market is trending. Very often, price just bounces back and forth between a floor and a ceiling. This is called a range, or a sideways market.

Picture a lemonade stand where the price of a cup goes between $1.00 and $1.50 all summer. Up to $1.50, back to $1.00, up to $1.50 again. Lots of moving, but no real direction.

Why ranges happen

In a range, buyers and sellers are about equal.

• At the bottom of the box, buyers think "that's cheap" and step in.
• At the top of the box, sellers think "that's expensive" and step in.

Nobody is strong enough to push price out. It's a tug of war where the rope keeps sliding back to the middle. Ranges often show up after a big move, while the market "catches its breath," or when everyone is waiting for big news.

How to spot one

• The peaks are at about the same height, instead of climbing or falling.
• The dips are at about the same depth.
• If you draw a box around the price, most candles fit inside.

Notice this is the opposite of a trend. No higher highs. No lower lows. Just the same floor and the same ceiling, over and over.

How traders use ranges

Some traders like ranges, because the box gives them clear spots to watch: the floor and the ceiling. Others avoid them and wait. Trend tools, like trendlines, don't help much when there is no trend.

The breakout

A range can't last forever. Sooner or later, one side wins and price leaves the box. That's a breakout. A breakout above the ceiling means buyers finally won. A breakout below the floor means sellers won.

Many traders wait for a candle to close outside the box before they believe it, not just poke out with a wick.

The fake breakout

Here's the trap. Sometimes price pops out of the box, everybody gets excited, and then it falls right back in. That's a fake breakout, also called a fakeout.

Fakeouts happen a lot. One reason: many traders put orders just outside the box, and price can run through those orders and then turn around. That's why patient traders want to see the breakout hold, not just appear.

Remember

• A range is price bouncing sideways between a floor and a ceiling.
• In a range, buyers and sellers are about equal.
• A breakout is when price finally leaves the box.
• Fake breakouts are common, so many traders wait for a close outside the box.