A choppy market is defined as a market without any clear direction. Choppy markets can present themselves after an extended bull or bear market has been in place. When identifying choppy markets, a trader must first locate the highest high and lowest low over a number of sessions. These two swing points will give you your range. The next thing to look for is how well the underlying security trades within this given range. If the security puts up little fight when attempting to break through support or resistance, odds are the stock is in a choppy market.
How to profit in a Choppy Market
There are two methods for profiting in choppy markets. The first method is to buy support and sell resistance. When stocks are choppy, there is not enough supply or demand to push the issues through critical levels. So, if a trader simply buys the support levels and sells resistance, one can net substantial gains. The second method for making profits in choppy markets is to utilize oscillating indicators. These indicators will provide buy and sell triggers based on price movement. When stocks are in choppy markets, traders play close attention to oscillators, such as the RSI and Slow Stochastics. Many studies have shown that oscillators perform best during choppy markets, due to the fact if a stock is trending, a stock can stay overbought for a long time.
Change Your Mindset
Traders must change their mindsets in a choppy market. Many day traders in the late 90’s had grown accustomed to 25% gains intra-day. This of course changed as the market environment shifted from boom to bust. Hence, traders should not get greedy and will have to adhere to the rule that ”small gains equals big profits”.