Looking for overbought and oversold levels
By taking the time to understand how to trade sideways markets, you will be able to develop a more effective overall trading strategy, since almost all types of markets and almost all environments. will at some point move sideways.
The first step is to identify support and resistance levels, which are the boundaries between the price of an asset - stocks, bonds, commodities, foreign exchange, or cryptocurrencies - moves over time. If there is no trend, such boundaries tend to remain relatively well defined, forming channels, which may be horizontal or pointing either upwards to downwards. (If the price is slowly rising or descending, without a clear direction.)
Notice that typically this will happen following market turbulence, which is why sideways markets are also known as consolidating markets.
Once you have identified such channels, you have two options.
The first is to go long (buy) at the bottom of the price range and short (sell) at the top of the price range, waiting for the price to touch the other level and getting out of a trade.
On the other hand, some traders may look for a break in the trading range when the trend resumes and the price ends its sideways movement. This may bring higher profits, but is a technique that is prone to provide false signals, since the price may seem to be breaking out only to return to a consolidation.
Accurately find the trading position under fluctuations
When the market fluctuates, it stays between support and resistance most of the time. If you see the price rebounding at resistance and support levels, and this continues to happen, then you can consider trading at these levels. The most important thing when trading in this range is to use stop-losses, because once the range is broken, a stop-loss can help you get out of what would then be a bad trade in time.
- Long positions
To find an entry point for long position, you first need to find a price support level. If the price reaches the support level and rebounds, and the stochastic oscillation lines cross each other at the oversold level, you may consider going long. Your stop loss should be below the support point and your take profit should be close to the resistance level.
- Short positions
To find a short position, you can look for a price resistance level. If the price reaches the resistance level and rebounds, and the stochastic oscillation line crosses downward from the overbought level, then consider going short. Your stop loss should be above the resistance level, and your take profit should be close to the support level.
Determine the best time frame
The most suitable time frames for interval trading are the 1 hour and one day time frames. Whereas you might manage to find short-term entry points in the 1-hour chart, traders usually look for long-term trades on the daily chart, due to the large distance between the support and resistance levels. Such trades might be substantially more profitable. Be aware, though, that in order to trade the daily chart a trader usually needs to have a larger stop loss.
Notice that this material is purely educational and does not constitute financial advice. Trading involves significant risks. You should only be trading what you can afford to lose.