Trading Sideways: Definition, Examples, Making Money

You Can Still Make Money in a Sideways Market

Traders in 2009
It's hard for traders to make money in a sideways market. Photo by Chris Hondros/Getty Images

Definition: Trading sideways is when investment prices remain within a range for any period. They don't make higher highs or a breakout above the previous highest price. That would indicate a bull market

Prices don't make lower lows, or drop below the previous level of support. That suggests a correction or even a bear market when prices pursue a downward trend. 

A sideways trend usually refers to the stock market.

That includes the Dow Jones Industrial Average, the S&P 500 or the NASDAQ. However, it can occur in any investment, including bondscommodities or foreign exchange

A sideways market usually means prices are getting ready to continue forward in the same direction they had been in before. It's unlikely that a sideways market will occur before a significant change in direction.

That's why it's also known as consolidation. It's a normal part of trading action. Traders are uncertain as to which direction the market could make next, and so are consolidating gains by being cautious. They wait for the market to reverse course. The longer they hold on, and there is no definite change, the more confident they become. 

Usually, consolidation occurs as the market gets ready to make higher highs or lower lows. There is a critical exception. If it occurs during a transition of the business cycle, it could signal that the next phase of the business cycle is beginning.

That's why you also want to pay attention to leading economic indicators.

For example, it there has been a period of irrational exuberance, that signals the peak of the business cycle. A sideways market could occur before a downturn. Similarly, a recession marks the bottom of the business cycle. A sideways market at that time might signal a new bull market.

Examples of a Sideways Trend

A sideways trading pattern occurred at the end of the contraction phase of the cycle in 2011.  Gold prices hit $1,895 an ounce. Investors boosted gold prices on fears of a further contraction. They were worried about Congressional threats of a debt ceiling crisis and potential debt default. Once fears subsided and the bull market in gold was over, the commodity traded sideways throughout 2012. As the economy continued to improve, gold prices entered a bear market in 2013. Prices continued falling in 2014.

A sideways trend can also mean that one asset class is turning over to another one. For example, a consolidation can occur when traders move away from small-cap stocks to large-cap stocks. That typically happens in the middle of the expansion phase of the business cycle. 

How to Make Money in a Sideways Market

A sideways market is a difficult environment to make money for day traders. It is a welcome sign for those who are more likely to buy and hold. With patience, the market will reveal which direction it will head into next. It's especially important to watch when the economy has been at any business cycle phase for an extended period of time.

The best way to make money in a sideways market is to be diversified.

 That way, you won't lose too much or gain too much when the market breaks out. 

Most studies show that it's more important to have the right asset allocation than to try and correctly time the market. When the market is drifting sideways, it's a great time to rebalance your allocation. For more, see Stock Market Tips: How to Profit from the Business Cycle.