Trading with Sideways Price Action Area
In this article, I will discuss the two approaches to Trading with Sideways Price Action Area in detail. Please read our previous article, where we discussed how to trade with smart money, before proceeding to this article, as it is a continuation of how to trade with smart money. As part of this article, we will discuss the following pointers.
- Two approaches to trading with a sideways price action area
- How enter?
- How to exit?
- Odd enhancer
How to trade with SIDEWAYS Price Action Area Break Out?
A minimum of three candles are required for a sideways price action area break out.
Here are two approaches to trading the breakout designed to minimize risk:
- Buy the initial breakout when the conditions are right
- Buy the retracement to the breakout when you need confirmation
Break Out Condition
Now that you know TWO tactical approaches to trade the breakout, let’s look at how to recognize which OR breakouts are the best to trade. Again, I’ve created a quick checklist for evaluating a stock’s price and volume action. Remember, these criteria are used to find stocks likely to lead to a successful breakout and to define good risk points based on the stock’s price and volume action.
- For bullish breakouts. look for a price to hug the top-of-the-range
- The quicker you enter a range breakout trade, the better.
- Trade with the trend. In a bear market, downward breakouts tend to make more money than upward breakouts in intraday trading. In bull markets, upward breakouts make more money.
- For upward breakouts, trade only those situations where the price most often closes above the middle of the opening range. Downward breakouts from the opening range do best when the price most often resides below the range’s midpoint.
- There is no resistance above breakout of the bullish breakout
- Break out with volume
- After the breakout, the stock exhibited bullish price action for up breakout.
Trade set up 1: For Opening Sideways Price Action Breakout
Logic: 1st candle of the day should be a heavy volume
Why heavy volume on the first candle of the day?
We are trying to identify what the SM sentiment is for the day. If Smart Money wants to buy stock, we would see that on the open with heavy volume and strong directional move. Stock may gape at the opening, which shows that the stock may trend up the rest of the day.
Open = low of the first candle indicates SM is strongly bullish
1st candle having a lower wick indicates the price tray to move down, but Smart Money enters to drive the price higher
- 1st 5-minute candle should be a wide range candle with a low wick or no wick with volume
- Stock in an uptrend with price above new demand
- The next candle/candles should be inside candle be a doji or a shooting star or narrow-range candle with less volume
- The range stays within the top 2/3rd of 1st candle
- Price extended from 20ma on entry time frame ( I am using 5 minutes)
- Sideways pa area volume is almost equal or more relative to the first candle
- Entry time frame not trading just above demand or supply on a higher time frame
- Less than a 3 to 1 reward-to-risk ratio to target on the chart
3 action steps:
➡ Buy 1-2 cents above the second candle, preferably a Doji or shooting star if playing long. The opposite of playing short.
➡ Upon entering your place, stop loss 2 cents below 1st candle or low of the last swing low
➡ Target is 2R
Trade set up 2: Pull back Break Out
SEE THE PULLBACK FOR CONFIRMATION
SMART-MONEY ALWAYS BUYS FROM VWAP OR AROUND VWAP IF THEY WANT TO BUY
See the pullback to VWAP OR 20 EMA. If the price pullback to VWAP EMA but is unable to push and hold below VWAP, indicating that the buyer’s strength
- Low volume
- Lower wick
- NARROW RANGE CANDLE
- Already traded to target on a bigger time frame
- Sideways pa area volume is equal or more relative to the first candle.
- Less than a 2 to 1 reward-to-risk ratio to target on the chart
Let’s do an example
ON A DAILY TIME FRAME
On a daily the uptrend
HIGHER TIME FRAME ANALYSIS
ON 30MINUES OR HOURLY TIME FRAME
TRADING TIME FRAME
I am using entry-exit for a 5-minute time frame
Trading with Sideways Price Action Area Summary:
Trading within a sideways price action area, often called “ranging” or “consolidation,” involves identifying a market that is not trending in either direction but oscillates between two roughly horizontal levels of support and resistance. Here’s how to approach trading in such a market:
1. Identify the Range
- Use historical price data to identify the upper resistance and lower support levels that contain the price action.
- Confirm the range by ensuring the price has touched and reversed from these levels multiple times.
2. Wait for the Price to Approach Range Boundaries
- Observe the price as it moves towards the support or resistance level within the range.
- Prepare to make a trade as the price nears these boundaries.
3. Look for Entry Signals
- Look for bullish reversal patterns or signals at support levels, such as hammer candlesticks, bullish engulfing patterns, or an upward crossover in moving averages or oscillators like the Stochastic or RSI.
- Look for bearish reversal patterns or signals at resistance levels, such as shooting star candlesticks, bearish engulfing patterns, or a downward oscillator crossover.
4. Execute the Trade
- Buying: Enter a long position near the support level if bullish signals confirm the price is likely to rebound.
- Selling: Enter a short position near the resistance level if bearish signals suggest the price will fall away from the resistance.
5. Set Stop Losses
- For long positions, set a stop loss just below the support level to minimize losses if the support breaks.
- Place a stop loss just above the resistance level for short positions to protect against a breakout to the upside.
6. Establish Profit Targets
- Set profit targets within the range. For long positions, consider setting a target just below the resistance level. For short positions, set a target just above the support level.
- Some traders use a risk-reward ratio to determine their target, ensuring the potential upside is worth the risk.
7. Monitor Price Action and Volume
- Pay close attention to price action and volume as the price nears your target. A significant increase in volume could indicate a potential breakout.
- If the price action suggests a breakout is occurring, be prepared to close your trade to avoid losses.
8. Consider a Breakout Strategy
- If the price breaks through the resistance or support with high volume and momentum, a new trend could be initiated. Adjust your strategy accordingly to cut losses or follow the new trend, depending on your analysis.
9. Risk Management
- Never risk a small percentage of your capital on any trade within a range.
- Employ a solid risk management strategy, balancing potential profits against possible losses.
10. Review and Adjust
- Regularly review your trades to learn from both successful and unsuccessful transactions.
- Adjust your strategy as market conditions change or as you discover new insights into how price behaves in ranges.
Sideways markets can offer numerous trading opportunities due to the predictability of price bouncing between support and resistance. However, it’s important to recognize that ranges don’t last forever, and the market can break out in either direction. Hence, staying nimble and having clear rules for managing such transitions is critical. Always be aware of market news and events that can cause a range to end and a new trend to begin.
In the next article, I will discuss the Pullback Trading Strategy in detail. In this article, I explain the two approaches to Trading with Sideways Price Action Area in detail. I hope you enjoy this article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.