Trading up in a sideways market
WHEN it comes to the markets, most traders are agnostic about which way the market is moving, whether up or down, just as long as it is moving in a direction. Following the trend is one of the basics of spread betting. But markets move in a non-trending or sideways direction more often than they trend. This has been particularly true this year, where flat, sideways markets with no day-long narrative have often made it a slog to get a strategy to consistently pay off. So how do you achieve results in a sideways market? One effective strategy is to tighten the range in which you trade. Barclays has broken out of its trend, but had been ranging between 210p and 220p for most of last week. As David Jones, chief market strategist for IG Index, points out, we saw buyers at 220p and sellers at 210p but there was nothing to be gained from trading around 215p – a no-man’s land for takers. In such a market, traders should identify the support and resistance levels which are the boundaries of the channel. When the price approaches support or resistance, then you should look to establish a position. In the case of the Barclays price action, looking to take a short position at 220p in anticipation of sellers driving the price down and on the other side looking to establish a long position at 210p in anticipation of buyers being tempted into the market. This swing trading example can be used for any time frame, but is most effective on a daily chart. Typically, the strength of support and resistance points is seen as being stronger the more times the market has tested that boundary. Also, the longer that channel has been in place, the more reliable that channel can be seen to be. But as the Barclays example shows, it is important to be vigilant in case of a breakout from the range. As usual, this is where a well-placed stop loss can come in. In order to protect against a sudden breakout, a good strategy is to place a stop outside of the determined support or resistance line, meaning that if an event should shake the markets, you won’t be hit by big losses.
Another way of achieving volatility and with it increased chances to gain is through the use of binary options. To take the example of the FTSE, with half an hour left until the market close, the FTSE could be trading at 5,700, down 12 points from Monday’s close. The binary price given by IG for the FTSE to finish up is 18-22. If you believe that the FTSE is going to rally on the day, you can bet £10 a point at 22. All binaries close at 100 or 0, meaning that if the FTSE were to close strongly, up 2 points, your binary would settle at 100, netting you £780. If wrong it would settle at 0, losing you £220. As a result, rather than the two points of a straight FTSE position, you’ve leveraged to closer to eight points with a healthy risk reward ratio.