What is Market Chop and Should You Trade It?

One of the biggest components of successful trading is the ability to understand current market conditions. Many new traders learn the hard way that trying to force trades in a market without direction can be a quick way to lose money. Sometimes, the most prudent thing to do as a trader is to do nothing at all. It all depends on what market conditions are like, your personal trading strategy, and your comfort level. Financial markets are constantly evolving and incorporating new information into security prices. As a trader, you need to adapt too.

It pays to be able to recognize different types of markets. Beginner traders often learn to distinguish different market conditions through trial and error. Instead of practicing patience and waiting for market conditions to fall in line with their trading plan, they persist with futile attempts to force trades. Trading in a bull market is completely different than trading in a bear market, and vice versa. However, what happens when the market is not heading in any clear direction? Should traders attempt to find opportunities even when there is no recognizable trend? These are questions that every trader should have clear answers for.

Market Chop Defined

The stock market is full of lingo and terminology that you won’t find elsewhere. It’s almost like speaking an entirely new language. One of the common terms you will hear experienced traders mention is “market chop” or a “choppy market”. When they state that there is market chop, it means that the price of a security, an index, or the overall market is not moving in any clear direction. The price simply “chops” up and down in small movements in the timeframe you are looking at. Market chop is also referred to as a sideways market because the price action is not clearly moving up or down.

Market chop can happen in all different time periods and in any market condition. It can occur for a variety of different reasons, including market participants awaiting a catalyst or general uncertainty in the market. Since the equities market is known as forward-looking, chop often occurs when we are waiting on headlines such as a large economic event or report. Market chop tells us that both buyers and sellers are balanced at the time or that they are fighting each other without either side coming out victorious. Market chop will eventually subside when the market finds direction and starts a new trend.

The Trend is Your Friend – Until it Ends

Lots of traders struggle to find profitable opportunities in choppy markets. This is because a lot of traders base their strategies on trend analysis. When the market is moving in a clear direction and provides a sustained movement in price, they jump into action. On the other hand, when there is no clear direction in the market, it can be quite difficult for trend traders to find proper trade setups. These types of traders get caught in traps such as false breakouts because they don’t understand that the market is sideways and simply bouncing between a specific price range.

Trend traders that focus on day trading and swing trading strategies are at a disadvantage when market chop is prevalent. However, if you are a trader that is focused on quick scalps throughout the day, you can find opportunities in market chop. If you want to decide whether or not you should be trading a choppy market, it can help to take a step back and reflect on your overall trading strategy. Consider things like how long you plan to keep a position open, what indicators you rely on for entries and exits, and how skilled you are at trading volatility. Whatever you decide, remember that forcing trades can lead to serious damage to your trading account.

Putting it All Together

Market chop signifies indecision in the market. It can be consolidation before a big move up or down, but the truth is that it is difficult to time those moves in market chop. If you do decide to trade in a choppy market, make sure you are skilled at range-bound trading and identifying key levels of support and resistance. You also might want to keep your stops tight, especially in periods of high volatility. If you aren’t comfortable trading the chop, just sit safely on the sidelines until a new trend reveals itself.