By Taro Hideyoshi
Generally, traders need solid uptrends and downtrends to take profits from the market. However in non-trending or sideways market, swing traders, who short-term trade, present a lower risk opportunity.
Traders can use the reversal patterns; I have introduced you in previous articles, to trade in sideways. Using the patterns to plan to enter a trade and establish tight stop loss. Also use trailing stop when prices move up or move down in the same direction as your trade.
To trading using the reversal patterns in sideways market, first you have to define the ranges of traded price. Then you have to wait until the price traded around the boundary of that range. When the price traded near the boundary, keep monitoring it to spot any reversal patterns it might form.
For example, if you wish to participate on the long side in non-trending market, you should wait until the price traded around the lower boundary. While the price is trading near lower boundary, there is a chance that he price will form the reversal pattern. In this case you may seek for double bottom or reverse head-and-shoulder pattern.
If you spot the double bottom, go long as the price reverses from second low, as it rises over the high of the previous low day.
If you spot the reverse head-and-shoulder pattern, go long as the price complete the right shoulder, as it rises over the neckline resistance.
Do not forget to set your stop loss point. You may place the stop few ticks below the neckline since it works as support level after it has been broken. While you are defining stop loss and exit point, you will see your risk/reward ratio (as I discussed about this in one of my article). You risk/reward ratio should be at least 1:3 to be worth for you to enter the trade.
For going short, you can use the same rules as going long but reverse them.
When you are trading using reversal patterns, do not use them as standalone indicator. You have to put it together with other indicators. For example, if you anticipate going long, besides the double bottom or reverse head-and-shoulder, you should consider the indicator such as the relative strength index (RSI). If RSI makes a bullish divergence, it supports that the reversal is coming.
The risk is lower when all signals tell you the same. So, wait until all indicators are in gear in order to minimize your risk.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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