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Crypto Explained

How to Trade in a Sideways Market

Tuesday, February 16, 2021

Cryptocurrency markets are famous for their inherent volatility, yet they are also no stranger to quieter periods. In fact, Bitcoin (BTC) spent almost two months in the summer of 2020 locked in a stubborn trading range between $9,000 and $10,000. The number-one cryptocurrency almost resembled a stablecoin with its uncharacteristic lack of volatility during that time. So, how do traders learn to trade in sideways markets and capitalize on the smallest fluctuations in an asset's price? Here are a few tips.

Define the Trend

Before crafting a trading strategy that allows you to make gains when the markets are barely moving, it's essential to be sure that you're trading in a sideways market. This means understanding how to define the trend. Essentially, a sideways market (or a sideways drift) occurs when an asset is fixed in a stable trading range with no notable moves over a period of time. Instead, the price action simply oscillates in a horizontal range, as you can see from the chart below.

While it can appear easy to spot a sideways market with a simple glance, in reality, professional traders need more tools in their arsenal to be able to define the trend. This can be detected using multiple different ‘oscillator’ indicators, the most popular of which are MACD, RSI, Bollinger Bands, and Average Directional Index (illustrated in the screen captures from EQUOS.io below). 

1. MACD 

The MACD or Moving Average Convergence Divergence displays the relationship between two moving averages of an asset's price on what is known as the MACD line. A nine-day exponential moving average (EMA) of the MACD, the "signal line," is plotted above the MACD line and can provide traders with crucial triggers in the shape of buy or sell signals. When the MACD moves up through the signal line, it is an indication to buy, and when it moves down through it, it is a signal to sell.

In the chart above, you can see the red signal line and the yellow MACD line. When MACD goes below the signal (the green histogram shows the strength of this inflection point), then it is a sell signal. The quality of this can be reconciled with the main BTC price chart at the top.

2. RSI                

The RSI or Relative Strength Index is another good indicator to use for early trend detection, especially in conjunction with the MACD. This shows traders when the asset (in this case, BTC) is moving into overbought (70% line) or oversold territory (30% line). Therefore, an RSI number ranging from 40-60% would indicate a sideways market.

3. Bollinger Bands 

Bollinger Bands are used to illustrate trade entry and exit points in a similar mold to the RSI, in that they are also oversold and overbought representations. The market standard is to set the bands at two standard deviations above and below the 20-day moving average. On the above chart, the Bollinger Bands are shown on the main price chart at the top.

4. Average Directional Index

Traders use the Average Directional Index to gauge the strength of a trend illustrated by the other indicators. A number above 25 indicates a strong trend. This indicator alone is not really useful as, on BTC, it tends to indicate a strong trend most of the time. As such, it should only be used in conjunction with other solid oscillator indicators, such as the three above.

Capture the Trend

Once you feel comfortable that you've identified a sideways trend using any of the indicators in your EQUOS interface, you need to capture it. This means setting up buy and sell orders at the limits suggested by the indicators above. Since trends are generally short-lived, time is of the essence. Using perpetual futures to trade rather than spot allows you to get straight in on the action without having to purchase BTC first. 

It also enables you to short BTC and to amplify gains that would be significantly lower from spot trading in a narrow range by giving you extra firepower in the form of leverage. This is particularly useful for high-conviction directional trades on extreme indicator readings. On EQUOS, trading perpetual futures also means lower trading fees (0% maker) and greater order book liquidity to manage your capital more effectively.

Another popular strategy with traders in sideways markets is to use options to trade these ranges and collect a premium. If you were convinced, for example, that the market was set to drift sideways, you could sell shorter dated high-strike call options and low-strike put options. This means that you would be betting on BTC not breaking out of the range. If both options expire out of the money, you will have received the premium for both options as trading PnL.

However, this is an advanced strategy that involves a far greater level of skilled risk management than trading perpetual futures. 

Preparing for the unexpected

Traders can still benefit from substantial profits in quiet markets by learning to identify trends and using the right tools to take advantage of them, including perpetual futures, leverage, and options. Keep in mind, however, that no matter how deep your conviction is or how strong the oscillator indicators are, markets can be unpredictable. The biggest danger with range trading is that a sudden sharp move out of the range could result in a significant loss.

Always be sure to mitigate these losses by taking advantage of the features, such as stop orders, that are available in your EQUOS interface. Stop orders should always be placed just outside of the range, in order to cover shorts and exit longs. This way, if the market does make a sudden unexpected move, you can contain your losses.

Ready to analyze the current BTC trend? Create an account on the EQUOS.io today. Not only do you have access to a full suite of professional trading tools, but you can also immediately capture a trend—and profit on it—by trading perpetual futures with lower trading fees. Click here to get started.

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