How markets workUpdated 3 min readBy the FXNOD team
How to identify trending and sideways markets
A trending market makes a series of higher highs and higher lows, or lower highs and lower lows. A sideways market moves between a ceiling and a floor without progress. To tell them apart, look at the swing points, the slope of a moving average and where the price sits relative to it. The answer depends on the timeframe.
The three states
| State | Swing highs | Swing lows | Moving average |
|---|---|---|---|
| Uptrend | Rising | Rising | Sloping up, price mostly above |
| Downtrend | Falling | Falling | Sloping down, price mostly below |
| Sideways | Roughly level | Roughly level | Flat, price crossing back and forth |
Four checks
Mark the last four swing points
Two highs and two lows. If both pairs step in the same direction, it is a trend. If they overlap, it is a range.
Look at a 50-period moving average
A clear slope with the price on one side is a trend. A flat line the price keeps crossing is a range.
Zoom out one timeframe
A trend on the five-minute chart may be a pullback inside a range on the hourly chart.
Check the candle overlap
In a trend, candles make progress. In a range, each one overlaps the last.
Why it matters
Strategies are built for one state and lose in the other. Trend-following methods such as moving average crossovers and breakouts make money in trends and are whipsawed in ranges. Range methods such as buying support and selling resistance work until the range breaks. The most common reason a tested strategy stops working is that the market changed state.
| Tool | In a trend | In a range |
|---|---|---|
| Moving average crossover | Works | Loses repeatedly |
| RSI above 70 or below 30 | A sign of strength, not a reversal | A useful reversal hint |
| Breakout entries | Follow through | Mostly fail |
| Buying support, selling resistance | Dangerous against the trend | The core method |
The transition is where money is lost
Markets spend more time ranging than trending, and the change from one to the other is only obvious afterwards. Accept that you will be late. Reduce size when the picture is unclear, and step aside when your method's conditions are not present.
On synthetic indices
A random series produces stretches that look exactly like trends and ranges. On a volatility index they are produced by chance and say nothing about what follows. Indices such as Deriv's Boom and Crash or Step families have built-in behaviours of their own; read Deriv's description of an index before you interpret its chart.
Questions people ask
- How do I know if a market is trending?
- The swing highs and swing lows both step in the same direction, and a medium-length moving average slopes that way with the price mostly on one side of it.
- What indicator shows a sideways market?
- A flat moving average and narrow Bollinger Bands. The ADX indicator is designed for this: low readings indicate no trend.
- Is it better to trade trends or ranges?
- Trends offer larger moves and are simpler to trade with. Ranges are more common. Most traders do better choosing one and standing aside in the other.
Watch it on a live chart
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