While long-term investors tend to practice some level of patience while waiting for stocks to go up, short-term traders would rather see movement -- either up or down -- to allow for profitable trade set-ups. A sideways market provides little action for the short-term trader to grab as a trading opportunity. This type of market acts like it sounds: not much share price movement in either direction.
In the stock market, technical analysis is the study of price and volume action with the goal of predicting where share prices will go next. Short-term traders focus a lot of their attention on this type of information when deciding when and where to trade. A big part of chart study involves looking for trends -- either up or down -- and picking a price at which to jump in and ride a trend to profits. Traders may also focus on trying to predict turning points, when trends reverse themselves.
Horizontal Price Movement
A sideways market is one without a readily discernable up or down trend in prices. On the Nasdaq stock exchange website, "sideways market" has the same definition as "horizontal price movement." In a sideways market, share prices move in a narrow range, changing direction before anything that looks like a trend can develop. Sideways markets can be very frustrating for traders. "Range bound" is another term describing a sideways market.
A sideways market can be tough on traders, resulting in losses of trading capital. A hardworking trader sees what he thinks is a developing trend and puts in a trade, only to see the price reverse back into the sideways channel, resulting in a probable loss. Since traders tend to look for trends, it can be difficult to see that there is no trend, and the market has gone horizontal. In this kind of market, a trader needs to practice patience until there are stronger signs that the sideways curse has been lifted and the market is definitely trending up or down.
Adding Some Strategies
Since sideways markets do occur sometimes, a trader who wants or needs to make money in all markets should look into some trading strategies that work when prices are stuck in a narrow trading range. If the price action slows and the market moves sideways, a strategy to pick up smaller profits may be a better course of action. Another skill to master is being able to detect when the market goes from sideways back to a trend.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.