How to trade Choppy/Sideways Market

By | August 15, 2014

During one of my trading session, a student told me

“Sir I am a small trader , I make good money in trending market but when market goes sideways/choppy i lose my profit and most of my trading capital”.

 

I asked him, Do you know the difference between trending and choppy market, He said Yes. Than i said “Why you do not stop trading when market are choppy” , He did not have any answer.  I continued saying its not a problem with you in particular but with most of traders and summarized it as

“Many traders trade during choppy market condition because they feel that ‘itch’ to be in the markets all the time. they think they’ll miss out on opportunities if they don’t trade all the time. Don’t worry about ‘missing out’ on opportunities, the market is not going anywhere and it’s better to be slow and methodical than fast and impulsive when it comes to trading your hard-earned money in the markets.”

What exactly is a ‘choppy’ or market?

First off, in order to know the best times to avoid trading , we need to be able to distinguish between market conditions that are worth trading vs. those not wroth trading. So, this involves having a thorough understanding  how to visually observe this price action and determine whether it’s trending, range-bound, or chopping sideways.

Essentially, there are two market conditions worth trading and one not worth trading. The two worth trading are a trending market and a range-bound market that’s moving between a defined support and resistance. The one condition that we want to avoid is a ‘choppy’ market condition which is simply backing and filling in on itself in a very erratic manner with no real boundaries or direction, It happens when volumes are quiet low or after a Big run up in market, Prices want the moving averages to do a catch up.

First, let’s take a look at a chart of a market that’s in an obvious uptrend. We would note the higher highs and higher lows which are visible just by observing the raw price action of the chart:

nifty daily

 

 

I  use 21 EMA Technique to assist in determining the intraday/ daily chart trend and dynamic (moving) support and resistance levels.

In the chart above we can see a clear uptrend took place, followed by a period of sideways consolidation and chop. While the only way to know ‘for sure’ when a market is moving to a choppy trading condition from a trending one is to wait until after it has happened, we can use the 21 day EMAs to assist us.

Generally speaking, when the daily chart  21 EMAs are ascending we have an uptrend, and when they’re descending we probably have a downtrend. In very choppy / sideways market conditions, these EMAs will actually turn sideways or ‘flat’ as the price action backs and fills right around them. So one thing we can do is to look at the slope of the daily chart 21 EMAs…when they start moving sideways, it’s usually a reflection of consolidation beginning.

Here’s an example of when a market turned from trending and worth-trading, to choppy and not-worth-trading.

nifty daily

When the EMAs are flat and generally moving sideways with no obvious up or down slope, the higher-probability play is to sit on the sidelines and preserve your capital until the market conditions become more predictable. In the image above, you will note that the EMAs went from ascending to flat / sideways as the price action moved into the rectangular box and began to chop sideways.

Sometimes in a wider range-bound market the EMAs will be sloped up or down temporarily but there is no trend. Thus, in a market that is ranging between a defined support and resistance level, the EMAs lose effectiveness.

However, when a market is chopping sideways and ‘backing and filling’ in a very tight consolidation range, we will see the EMA’s turn flat, with little to no slope. In this way, we can use them to help gauge when a market is in ‘chop mode’ and not worth trading. Once again, refer to the picture above, when the market begins to chop you’ll see the daily  21 EMAs go from up to sideways.

 

As discussed Many traders make the mistake of trading in all market conditions. The truth is that sometimes it’s better to just not trade. Sometimes the markets are too choppy and erratic to trade with any accuracy or effectiveness. It is these times when traders tend to give back all their recent profits (and usually more).

I am going to let you guys in on a little ‘secret’ today; the fastest route to making money in the markets is by capital preservation. You see, most traders do not preserve their trading capital long enough to make any substantial gains in the market. Instead, they trade it all away in a flood of emotional trades that bust their trading account and when trend returns they are left with no trading capital to go and trade in market.

As a trader your Job is to understand market condition, and wait for an perfect Opportunity to make a trade. Their is no Guarantee Trade will be a success but at least with SL   it will make sure that you are not an impulsive trader and you wait for next opportunity till you strike a perfect trade. You need to act as per market conditions, market will not act according to you.

So if you are also facing difficulty in how to trade Choppy market start implementing the below point and see if it helps in improving your trading.

Take a Time off from market

Don’t trade for a some time may be 1 week or 2 Weeks, Stay away from market for some time. There are 52 weeks in a year…you don’t NEED to trade every one of them. It’s fairly safe to say AT LEAST 5 or 8 of those weeks (probably more) will contain very choppy price action that will shred your trading account up if you try to trade it. One of your jobs as a trader is to identify when the market is entering into a consolidation phase that is too choppy to trade. I’ll admit, this is easier said than done, but once you spend more time analyzing a market’s price action, it will become easier for you.

One thing you can do is to simply take some time off after a winning trade. It has been scientifically proved As a Human being we are biologically wired  to trade more after a winning trade or a series of winners. Most of the time, these trades are fueled on emotion and on an over-estimation of our own ability to predict the market. In short, after you hit a few winners, trading seems a lot easier than it really is and we become blinded to the fact that we have the potential to lose money on any trade we take. It’s called trading on a feeling of euphoria, and it causes many traders to give back all their gains.

Taking time off from the markets is not a bad thing, especially after a winning trade or when the market is chopping sideways and being ‘erratic’. Many traders end up giving back all the money they made when the markets were trending as they move into periods of chop. This tendency is something that cannot be eliminated 100%, because no matter how good of a chart technician you are, it’s impossible to know when a period of chop is starting with 100% certainty. However, there are some very obvious price action based clues that we can use to help us identify a choppy market so that we can then stay out of it.

14 thoughts on “How to trade Choppy/Sideways Market

  1. Bramesh Post author

    I do not read books so cannot comment on this.

    Rgds,
    Bramesh

  2. Sarbjit Singh

    Bramesh ji your writings are very meaning ful and useful to follow. i want to learn from you. Can you suggest some reading mtrl on technical basics before I start basic course with you. I feel without basic minimum knowledge I will be wasting your and my time.

  3. DEVENDRA

    EXCELLENT. THE REAL EFFECTIVENESS COMES WITH PRACTICE TO OBSERVE PRICE ACTION.

  4. vaishnav

    Nice one but most imp ques is that how to identify that Choppy market is over & we should take position.. Particularly SAR based position..

  5. Nikhil

    Good article thanks a lot sirji. But as always there is another question we would like to ask. How do we figure out the choppy move is coming to an end and that it’s time to trade again 🙂

  6. arvind

    Sir, what should we do with the Dmat cash margin during the time we are off, are there some risk free liquid etf or treasury fund kind of products we can buy online for few days to few weeks to earn some interest and then selling is easy too. Thanks

  7. Manish

    Some seasoned traders use these choppy conditions to make more than average profits, but it takes years of experience and a really big wallet for such practice… Nice article…

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