Indicators For Sideways Market: While trading in the stock market, you might have come across situations where the market is stuck in a range (or sideways). This situation can be a bit tricky for traders as there isn’t any trend followed.

In this article, we will discuss what sideways markets are and the best indicators you can use to find good trades in a sideways market.

What Is A Sideways Market?

A sideways market can be simply defined as one with no bullish or bearish trends. Prices trade within a horizontal range, with no definitive upward or downward movement.

To put that more plainly, a sideways market features tight ranges; prices don’t make higher highs or lower lows.

Sideway markets occur with frequency and often indicate that traders have some uncertainty about the direction the market is taking. As a result, many traders exercise caution, consolidating profits during range-bound periods.

How To Identify A Sideways Market?

Identification of support and resistance levels is key to identifying a sideways trading environment. These levels create a range dictating short-term trading behaviour.

Traders will enter a position once the price drops to the support level and sell when the price rises to resistance levels.

Best Indicators For Sideways Market

Let’s have a look at the best indicators for sideways market, Keep reading to find out more!

Bollinger Bands

The Bollinger band is a powerful indicator that provides traders with multiple trading signals. Most traders use it as a volatility channel and a momentum tool.

Traders pay a lot of attention to the Bollinger band squeeze which occurs when the lower band and upper band converge or come together often after a trending period.

A Bollinger bands squeeze or contraction indicates less volatility in the underlying market. Bollinger bands work best in range-bound markets.

When the bands are thin and contradicted, volatility is low and the price moves within a range you can take trades when the price touches the upper band or lower band in the opposite direction. 

In the image below you can clearly see how well the upper bands and the lower bands act as resistance and support.

upper bands and the lower bands act as resistance and support | Best Indicators For Sideways Market

Source: Investing.com (Nifty 50 chart, timeframe: 15 mins)

Donchian channel

Donchian channels work well in range-bound markets like Bollinger bands.

Donchian channels are 3 lines produced by upper and lower bands around a middle or median band and generated using moving average calculations.

The upper band represents the security’s greatest price over N periods, while the lower band represents a security’s lowest price over N times. The Donchian channel is the area between the upper and lower bands.

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When the bands are thin and contradicted, volatility is low and the price moves between a range, indicating a range-bound market. 

In the image below the upper bands and lower bands of the donchian channel are perfectly acting as resistance and support for the price.

Every time the price touches the upper band it takes resistance and moves downward and every time the price touches the lower band it takes to support and moves upward.

upper bands and lower bands of the donchian channel | Best Indicators For Sideways Market

Source: Investing.com (Nifty 50 chart, timeframe: 15 mins)

IV Skew

The volatility skew is an options trading concept that asserts that option contracts for the same underlying asset with various strike prices but the same expiration will have varying implied volatility.

Skew compares the IVs for in-the-money, out-of-the-money, and at-the-money options.

When the ratio of this indicator is between 1.3 to 0.80, it indicates that the market participants are confused and waiting for confirmation on either side.

Index PCR OI

The put/call ratio(PCR) is a prominent derivative indicator used to help traders to determine the market’s overall sentiment. The ratio is derived using option trading volumes or open interest for a certain period.

If the ratio is greater than 1, it means that more puts were traded on that day whereas less than 1 indicates more calls were traded.

Whenever PCR OI is in the range of 0.90 to 1.05, it indicates a rangebound market. Usually, you get to see a one-sided trending move once the range is broken on either side. The image below shows the PCR OI and PCR vol for Nifty and Banknifty.

The data in the table below shows that the PCR OI of Nifty is 1.15 which means there is bullish sentiment in the market and the PCR OI of Banknifty is 0.94 which means that there is no clear direction in the market and it could be a range bound market.

(Image Courtesy: IIFLsecurities.com)

Also Read: Buy And Sell Volume Indicators – Importance, Types & More!

In Closing

In this article, we understood what a sideways market is, how it can be identified and learnt about the Best Indicators For Sideways Market.

You should note that whether you are trading in a trending market or a sideways market, a good trader can make profits whatever the case may be.

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