Trending, Sideways and Volatile Markets

These market "characteristics" affect your buy and sell decisions. Many indicators can help you determine if and when a market begins an up trend, downtrend, or sideways direction. There is much debate, however, as to the length of time needed to make this determination as well as individual preferences on other factors, such as what price level percentages to use to determine a price breakout.

The key is understanding the concepts of trending, sideways, and volatile markets, and learning how to use the various technical and fundamental studies to identify market direction and significant reversals in direction.

Trending Market

A trending market is characterized by sustained increases or decreases in price movement, and can be bullish or bearish. There may be small fluctuations (small and short-lived corrections) in price along the way, but the overall character is trending. A bullish trending market is a market whose data indicates an upswing, or rise, in price. Most investors recommend buying into a bullish market. The optimum is to buy at the beginning of the market upswing (or up trend).

Conversely, a bearish trending market is a market whose data indicates a downswing, or drop in price. Most investors recommend going short in a bearish market, with the optimum timing being at the beginning of the drop (refer to the section titled, "Long and Short Positions" for more information on 'going short'). The closer to the beginning of the downtrend you go short, the better your potential for making money.

The data interval you use can significantly impact the character of the market. For example, the same chart that exhibits trending conditions in a daily chart can exhibit sideways conditions in a monthly chart. You should evaluate the chart using the data interval you plan to trade.

Sideways Market

A sideways market moves with very little variation between the high and low price and is referred to as trendless. It can also be referred to as market that is trading within a range. Identifying a sideways market is important.

Many analysts advise against buying or selling in this type of market and prefer to monitor the market until some sort of direction can be identified. Data analysis can help you identify a sideways market and identify when it is beginning to make a significant move either up or down (referred to as a "breakout").

Volatile Market

A volatile market is characterized by significant but short-lived movements, either up or down, in price. Volatile markets often seem to come out of nowhere, providing quick and unexpected changes in volatility; this is typically called a 'volatility expansion.'

Volatility expansion strategies generally make short-term trades. You'll attempt to trade an immediate increase in volatility by buying an upside breakout, and likewise selling a downside breakout.

When trading a volatility expansion strategy, you will be out of the market a significant percentage of the time. Although volatility expansion strategies provide relatively small profits per trade, you will find a high percentage of winning trades in this type of market. You will often find gaps in volatility expansion strategies. Gaps are places where the price of one bar is higher than the high of the previous bar, or lower than the low of the previous bar (leaving a gap between the two bars). Gaps often signify that the market is making substantial and unexpected moves in one direction or another.