How to recognise Sideways and Trending markets

Trending and sideways phases are cyclic in any market and after a trending phase expect a sideways phase and after a sideways phase expect a trending phase.....if there is anything certain in the markets ...it is this.

Traders make money in trending phase and give it back in the sideways phase....sometimes they loose more in sideways phase. Every trader has to understand how he is going to negotiate the sideways phase so that he makes some money in it or at least preserve what he has made in a trend and again ride the trend when the market starts trending again...

How do we know that we are in sideways markets ? The charts will indicate that. I have taken an example of Nifty Futures 5 min chart.....we had a nice downtrend till point A , then we had an upmove upto point B.....the first indication of sideways market came when at point C market was unable to take out point B...then D,E,F,G all sideways moves till we get a breakdown of the range.....

Traders handle sideways phase in different ways depending on what he is comfortable with ...various ways of handling sideways phase are as under :

1) If you are a range trader, trade the extremes of sideways range....buy near the bottom of the range and sell near the top....

2) Decrease your volumes in sideways phase and increase back to normal volumes when trend starts.

3) Trade on sideways market indicators, oscillators, Bollinger bands extremes etc

4) Totally stay away in sideways phase and trade only trending phases....


So in this range either trade the extremes or just stay out and dont loose your capital and energy trading sideways markets......get on to trends when they start again.....

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When Not To Trade Is Very Important Trading Decision Too

When Not To Trade Is Very Important Trading Decision Too

Last few days have been sideways range days and the up moves as well as down moves are very fragile and they are not holding up. I have received many pms, phone calls from traders who are either trading their own methods or trading on calls given by others . And as these systems are mostly trend following systems they are hitting stoplosses regularly . Some call services have had 8-12 stops hit consecutively on full quantity, thus seriously damaging the trading account of some traders.

Trend following methods need sustained trends in the timeframe which we trade. Though the market trends only 25-30 % time, there is a trend on larger or smaller timeframe. Trend following systems cannot make money in sideways markets where trends are not durable tossing us in both the directions.

I have done some posts about how to know whether the market is trending or not. A trader has to understand the structure of the market he is trading and mindlessly following trend following systems in sideways, small range markets saying that " Descipline and Faith on the system will make money finally" is like banging our heads against a wall and saying if we do it with discipline and faith,one day the wall will break.. It may put our heads out of shape.

In such markets it is better to step back and not to trade till the market is in the sideways range....or trading smaller lots is very essential in preserving the capital and being able to keep the gun powder dry so that when the market comes out of the range and starts trending we can go with all guns firing.Large and continuous losses also put pressure on the mind of the trader and I really wonder whether after 10-12 continuous losses even most " disciplined" trader also will be able to take 13th and 14 th trade.......everyone should ask this question to our own minds....After sideways phase a trend will always come....it is much more cyclical in nature...so be financially fit to take full advantage of the trending phase...In sideways phase, the goal should be trading small, less frequently to preserve the capital

So preserve your capital, trade small in sideways markets.....dont do "Financial Harakiri" in the name of discipline. Remember that " When not to trade is very important trading decision"

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Strong Trend or Weak Trend?

They say that trend is your friend but that statement needs a qualification that it is your friend as long as it is not about to end.......how does one know that the trend is strong ?

I use following criteria to judge how strong the trend is...and when it is about to give explosive move.

See those magenta colour lines on the chart ? Those are the lines showing gaps in the earlier top and the reaction bottom after breaking the tops....these gaps show that the trend is strong and about to blow off.. .... After such gaps the trend accelerates.....you can see that on any chart, any time frame......if coupled with other techniques, it gives great confidence to hold the positions, add and wait till the trend is about to end.....

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Multiple Timeframe Trading

Multiple timeframes is a great concept even for day trading and short term trading . This concept was developed by many and Dr Alexander Elders and Robert Krauz are the two names I associate with concept of Multiple timeframes.

There are many ways multiple timeframe concept can be used in our trading. Some of the applications are as under :

1) Trade in the direction of trend on higher timeframe.....suppose you are trading 5 min bar, take all trades in the direction of higher timeframe...say 30 min timeframe. So if 30 min timeframe is in uptrend, take all long trades and no short trades.....our sequence of trades should be long...add....book profits.....stay out....again long...add....book profits. But what if the 30 min is not trending and is in sideways phase ? Either dont trade in this period or even if you take trades, be very fast to get out on first sign of trouble....We daytraders want our trades to move in our favour quickly after we enter....and we dont like hanging around in a trade which is going nowhere.

2) When longer timeframe is trending, we trade more aggressively in direction of that trend....we give bit more room for our trades to work.....but when the longer term trend is sideways.....these trades are small , choppy and frustrating ,we enter and exit fast....grab whatever profits we can.....but in trending period we play for big win. 

Bank Nifty Future on 5 min timeframe traded on the above multiple timeframe concept.....chart is self explanatory....

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Short Term Trend of Nifty Futures Reversed to UP in the Mid Session Today.

Nifty Futures opened flat today and initially sold off continuing the short term downtrend from yesterday. But in the mid session it reversed its short term trend to UP when NF pivoted above 5195 and traded above this level......the short term uptrend continued till the end of session. At the end the upmove showed signs of  fatigue and we will have to see what it does tomorrow....

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How to Daytrade

Intraday trading can be done in following ways :

1) Take all trades in the direction of the longer timeframe. So if we are trading on 5 min chart, see what is the trend on 30 min chart...if it is down, take all short trades on 5 min chart.....but your trade entry,stops and profit taking all has to be on 5 min chart.. This is relatively easy as we are trading in one direction generally unless the trend on larger timeframe reverses during the day..

2) Trade the intraday swings without any bias....trade as the price flow moves...trade from short and long both sides....this mode is bit difficult as we need to be fast in reversing our positions and we need to understand the market action well....and very rigid on stops....

Let us take the tougher part .....intraday swings. I am posting Telco 5 min chart for 2 days with trades , adds,profit taking points marked on the chart....

Posting a chart showing how to daytrade 5 min timeframe chart in the direction of 30 min timeframe trend. The scrip is Bank Nifty Future .The chart on top is 30 min and the visual trend on 30 min has changed to DOWN at the red line marked. In 5 min chart, we take all short trades, add and take our profits......no long trade as long as 30 min visual trend does not become UP.....Both methods are based on pure price action.....

Out of the two styles shown above which one is more profitable ?? Actually both are very profitable, the choice really depends on the mental set up of the trader....choose any style which you are comfortable with and you can handle with ease .....there should be no strain,tension while trading these charts...the moment there is strain , be sure that something is amiss.....

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What Should A Trader Do In A Sideways Market ?

Markets always go through trending and sideways phases. A sideways phase gives rise to trending phase and after trending phase we always get a sideways phase. This is very much predictable in any market, any timeframe.

If a trader is trading a trend following trading method trading Index Futures such as Nifty Futures , the sideways phase will give many false starts, whipsaws giving him losses.Trend following methods always make money during the trends and loose money in sideways markets. So if one is following a trend following method for all phases, he may make money overall if the length/ range  of sideways phase is smaller than trending phase....but if the sideways phase lasts long...the losses will mount. I have seen some average crossover trading methods giving 8-10 consecutive loosing trades in last 8-10 days when market is sideways.

How does one handle this situation ? There are ways to find out ( though a bit after the phase starts ) that we are in sideways market. Once that is identified, either don't trade a sideways phase with trend following method or if you are trading thinking that the market has come out of sideways phase, trade small so that till market really starts trending your losses are kept minimum due to false starts....and when trend starts again, you can start making money with your methods.....not trading in choppy sideways markets which are unpredictable is very important trading decision.

Last few days being sideways many traders asked how to handle such a phase as they are loosing and getting whipped ....and remember that after sideways phase, a trending phase definately comes.....so be in good shape to trade that trending phase which will follow.

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