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After some serious falls in late September and early October, the Australian sharemarket is trading sideways, in what we call a trading range.
Often we can look back at a sideways pattern in the market and think “Wow, what a boring period that must have been!”
However, its only when we trade through a period such as this that we fully appreciate the level of emotion that can be involved.
Don’t get me wrong – not every sideways market is this crazy! There will be times around holidays such as Christmas and July 4th that traders close out their positions and take a break, with fairly flat, sideways movements in the market.
But that is certainly not the case at the moment. Chart 1 below shows the recent price action on the SPI200 (AAi-spotv in Profitsource).
Chart 1
click chart to enlarge
We have seen large moves to both the upside and the downside. There has been extremely bullish news, followed by extremely bearish news behind each of these moves.
This reminds me of the period on the SPI from mid July to early August 2006, shown in Chart 2 below. I have used the Walkthru mode in Profitsource, to cover up the future data.
Chart 2
click chart to enlarge
At first glance, the market traded sideways in a 150 point range. However, those who traded this period will remember the market rushing up one day, then falling straight back down the next, only to head back up again the next day. This went on for around a month.
David Bowden says on the Master Forecasting Course DVDs that you can make good money in a strongly trending market, but you may find it hard during a “rat’s nest” such as the example above.
Safety in the Market General Manager Aaron Lynch wrote in his weekly column for YAHOO Finance that in times like these, you have three options – you can change your trading style to profit from short term moves, you can wait on the sidelines until the market starts trending again, or you can trade another market which is trending strongly.
The first option, short term trading, requires a much higher level of emotional control than end of day trading. Most new traders don’t have this level of control when they begin, so be warned!
It is quite simple to identify a trading range, place trendlines marking “Support and Resistance” as shown in Chart 3 below, and then buy near Support levels, and sell near Resistance levels.
Chart 3
click chart to enlarge
I know many traders took advantage of this period to capture 100 points or more, several times during this period.
Don’t be fooled into thinking this is day trading, and that you need to be in front of the screen all day. We are simply placing buy orders at the Support Level, with a Stop Loss, and taking profits by placing sell orders at the Resistance Level. You always need to maintain at least a 2 to 1, or a 3 to 1 Reward to Risk ratio when designing your own plans. For a review on designing your own trading plans, please revisit Section 2 of the Smarter Starter Pack.
The second option for times like these is to sit out, and wait for the market to make up its mind and start trending again. There is a lot to be said for this. You will always make better decisions when you are relaxed and refreshed, and for many traders these periods are just a signal from the markets that its time for a holiday.
The third option is to have another market that you can trade. David studied the SPI, the Swiss Franc and Soybeans, and this gave him more options for trading, and more chances of finding a strongly trending market.
WD Gann said that “conditions change, and we must change with them.” Clearly, in the current climate, conditions have changed.
I have given you three different paths you can consider, when confronted with a market that is travelling “violently sideways”. No doubt you can come up with some of your own strategies as well.
My preference is to sit these times out and have a mental “refresh”. I have a habit of pyramiding and building up some large positions when a market is trending strongly, and its often a relief when you can sit out of the market and enjoy your profits for a little while, before jumping back onto the next trend.
David always wanted you to learn as much as you can, so that you are able to assess any situation, and come up with a strategy that is both suitable and profitable for you. Remember, we are all different, that’s why it is so important that we become independent traders, capable of making our own decisions. That only comes through hard work, experience, and education.
When conditions change again, make sure you are ready to act!
Be Prepared!
Mathew Barnes
Trading Tutor
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