Range markets have a fundamental importance in trading and investment, especially for those who are dedicated to trying to follow market trends, that is, for followers of that famous phrase in the world of the stock market that says: “let the profits run.”
That phrase indirectly explains to you that what you have to do in the stock market is to follow the trend, because the “letting the profits run” implies that you are “riding” a significant directional movement, that is, a trend movement.
This issue affects very important short-term trading although it also has its role in the world of long-term investment.
Side markets in long-term investment.
If there is one thing that an investor does not like anything other than a bear market, it is a side market.
Do I need to explain it?
Obviously any investor seeks long-term capital growth and a lateral market implies that our investment will be stagnant for an indefinite time in a kind of range with the price oscillating between supports and resistances.
In those cases investors have a secret weapon called “dividends”, because even in those side markets if we have a dividend of, for example, 3%, we can be earning money in the long term, even though our assets continue to contribute at the same price 10 years later.
An example of this can be seen in the IBEX 35 in recent years, and in some of its names such as BBVA or Santander.
In particular, the IBEX 35 carries in a kind of secular lateral market of almost 10 years, ranging between 6000 and 12000 points or laterals of a secular type include many of the others, and so on until we go to the more short-term graphs: tick charts.
In another example of an important side market, such as the case of gold in the last five years, or even worse, in the 90s of the 20th century, we can see how investing in a market that goes lateral and that does not pay dividends is disastrous.
For example, the one who bought gold at 380 dollars in 1989 would see how 8 and 10 years later his investment would be similar or even lower with a swing in the price of gold so poor.
Not much better would have gone to the mining stocks so dependent on the price of the “vile metal.”
Short-term side markets
This side market is the same as the market in range, a much more common occurrence in the short term than in the long, especially in the shortest periods of time.
Why is this like this?
Because in the long-term trend market, for example the stock market, we can see that we have a clear upward trend.
However, if we reduce that typical chart with monthly bars to another with 1-hour bars in the Dow Jones, we will find a greater number of bullish, bearish and lateral markets.
The same will happen if we reduce this time slot to 1 minute bars.
That is, in a bull market of 50 years we can have millions of side markets, bullish and bearish ones.
What happens is that looking at the long term, we all agree that the stock market trend is bullish.
But this is not the case with the shortest movements that occur within said “inside” a bull market.
In fact, if we take a 1-minute chart for a period of 10 years, we will obtain x million bullish candles for almost x million bearish candles, which in the end we realize that when we leave in the short term we will be almost in a random territory, which is not so random in fact because it follows a kind of pattern.
In those movements there is every day, it happens that many days we have big climbs, others, big downs and others, we have days when the market is totally negotiating in a zigzag, without finishing up or down.
As we all know, everyone always talks about being bullish or bearish, but we almost never hear mentions of what happens in a side market.
Well in a side market we will find a wall that depending on the system we use, usually based on indicators of some kind, can end up being a disaster.
An example of this can be seen in an article about the “breakouts” (breaks) that I wrote some time ago.
In that article I spoke about the problem that resulted from trying to operate breakouts in short-term graphs using bars of 1, 5, 15 or 60 minutes.
This is so because although we have large bullish and bearish movements, we also have large intervals where the market is listed as a sierra, and in those cases many of the strategies based on seeking the “beginning of a trend”, such as the use of ruptures, ends in a complete disaster.
For example, if we look at the graph of the long-term DAX, in the last 8 years, we can see how this market has a fairly clear upward trend and the only thing that usually happens is that there are many corrections along the way.
The long-term side markets do not notice much, as in this case, although we can always see some, like the one that took place during 1914, something that in the long term is nothing but in a trader that negotiates with a view to days and weeks can be done forever.
Leaving us for a shorter period, such as the hourly clock, we can find a huge number of side markets.
For example, the one we have in the following chart would be a complete disaster for trading techniques that look for operatives looking for the trend.
Those systems would tend to give many signs of sale near the red line and many of them to buy around the blue line. The result of that would be that we would end up losing a huge amount of points and money.
Many will say: “Well, if I do that I lose so much what I should do is the opposite, buy on the red line and sell on the blue”.
That’s very good.
It is a logical deduction with common sense.
What happens is that when a bullish or really bearish movement arrives, we are going, not only to lose, but to lose that movement altogether, with the possibility of generating even more false signals along the way.
If that happens in the hourly candle markets, imagine in one of 5-minute candles, where we can already see that within a day we can have bearish, bullish or lateral markets, or the three occurrences in the same day.
This, the fact that in the intraday we have so many different occurrences in the same day is, contrary to what logic can tell us, something not good for us.
Well, because in that area, where we are operating graphics that give us 200 lateral markets a year, 200 bulls and 200 bearish, we totally lose the advantage that gives us the knowledge that in the long term the bull market shares.
Does that mean we cannot negotiate?
No, it does not mean that, but it does mean that a large part of the intraday movement is random.
That is why aggressive day trading, based on 1 and 5 minute graphics, is something that we should almost leave for others, because although it gives us more “opportunities” to negotiate, it also gives us the possibility to lose more quickly.
The quintessential graph of the side markets is that of one-minute candles (or any lower candle).
Curiously, said 1 minute candle chart is the quintessential day trading graph.
Why is this connection important?
Day trading and side markets
If you want you can look at the daily charts of one-minute hundreds of days of any instrument, be it DAX, EURUSD, IBEX 35, Apple, gold or even Bitcoin.
In this case the problem is that in all those trading days we will have a lot of bullish days, another fairly large number of bearish days and another no less large amount of side days like the chart.
Now I am going to tell you a little about why the vast majority of trading systems are destined to fail in day trading.
Virtually all day trading systems depend on the use of technical indicators.
Well, those technical indicators are based on the price, in its vast majority.
As they are based on the price, we will have indicators that will give us very good signals in markets days when the stock market rises or falls, and disastrous signals when the markets are lateral and vice versa.
That is, imagine that you have an X system based on the cross-media of Y.
This system turns out to behave very well on the days when the stock market moves in a trend, but behaves catastrophically when the market is lateral.
Imagine the one-minute candle chart of the DAX before the red line gave us bearish signals and the bullish blue because the market would already be “forming a trend”.
On a day like that, believe me, you could have a huge amount of losing trades.
Imagine 5, 7 or 11 consecutive losses.
Other days, however, when the stock rises, that indicator is quite good and you can earn several trades.
My long-standing experience tells me that the number of day markets on day-to-day charts is so great that the advantage of operating long-term bull markets (known as “investing”) is almost entirely lost.
On the contrary, if we look for a counter-trend operation, the same thing will happen to us.
We will win a lot on the side days and lose a lot on the other ones. And both types occur in an almost “fair” amount.
I encourage you to look at the one-day candlestick chart of the DAX so that you can see that despite having large ups and downs for weeks, it also sticks several weeks where the price almost does not move.
Day traders may think that not operating those days would be enough, but one thing is “believe” and another is “reality” and more when we are in the intraday market, in which you almost lose the notion of what the trend is.
On the other hand, there is a subject that we must also remember, and it is the fact that a good part of the bullish movements of the Stock Exchange take place in the night market.
This is another thing that I have also discovered after many years of observation and that is a fact well known by many market operators, especially those that have been around for many years.
For whatever reason, a good part of the bullish movements that occur in the big trends of the stock markets, in particular Wall Street, take place at night.
The latter makes the problem of losing the “advantage” of the long-term trend more accentuated by making possible trend systems lose much room for maneuver when they try to have the intraday market.
How to operate lateral markets in the short term?
Believe me, this is not easy, because there is no perfect answer that works for all cases; since all the lateral markets are different, with that what serves us for one does not serve us for the other.
These side markets are the main enemy of every trader, whatever the temporality.
The reason for this is simple: they are a kind of symmetrical market, the opposite of asymmetric markets.
The asymmetric markets are those in which the circumstance that traders like so much of all times occurs: trend movements.
Greetings and good trading.
Original article: Mercados laterales, la pesadilla del trader