QUANTITATIVE ANALYSIS
A Range Of Trading
Trading In A Sideways Market
by Anthony Trongone, PhD, CFP, CTA
When the markets are trading in a narrow range, you are likely to
become susceptible to emotional trading. But if you follow the emerging
patterns of a sideways market, you can trade successfully.
Without a thorough understanding of how
a sideways market functions, trading in such a featureless environment
can easily diminish the assets in your portfolio. You can achieve some
success from trading without adequate knowledge; unfortunately, it will
come without the benefit of sound planning. Although you may realize that
your trading is emotionally driven, your sporadic successes will reinforce
your desire to continue. And since emotional distractions are detrimental
to clear reasoning, it is necessary for you to supplant these emotional
impulses with a constructive strategy, one that will allow you to form
your decisions from emerging price patterns.
This article follows the performance of the triple Qs (QQQ) when prices
begin falling after entering the upper range (resistance), or recover from
the lower portion of the trading range (support). After establishing a
holding pattern, it can take days for prices to come within either a supporting
or resisting price range; therefore, much of your trading will take place
somewhere between these boundaries. Unfortunately, the literature on how
the technician should navigate within this middle terrain is inconclusive.
PRICING BACKGROUND
The analysis begins with an opening price of $37.156 on January 29,
2004. During the previous 115 trading days, the average opening price hadn't
gone above $37.70 or below $34.052.
With an average daily trading volume of 102.7 million shares, the Qs
are a good representation of investor psychology. They represent the intraday
movements of the Nasdaq 100 price index; however, they trade as a single
security, which allows investors to participate in the collective performance
of a portfolio of companies.
With such diversification, a large percentage decline in a particular
company has a less dramatic impact on the Qs. There are, however, more
compelling incentives for trading the triple Qs, such as smaller spreads,
a longer trading session, and the ability to take a short position on a
downtick. Finally, since it has an almost perfect correlation with the
mini -- Nasdaq 100 futures, trading can take place throughout the night.
FIGURE 1: THREE PRICE ZONES OF A SIDEWAYS MARKET. The
high, middle, and low zones are derived using the mean and standard deviations.
...Continued in the December issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to December 2004 Contents
