Old Wen Experience: How to Identify Trending and Sideways Markets?

A seasoned quant trader with 10 years of research
When doing quantitative trading, there's one unavoidable question:

“Is the market trending or sideways now?”
“Should I open a position with my strategy?”
Today, Old Wen in quant trading will talk about: how to identify trending and sideways markets.

1. First, understand: Why is it necessary to identify?
In quantitative trading, no single strategy can handle all market conditions.

Some strategies perform well in trending markets but are repeatedly swept in sideways markets; some strategies steadily harvest in sideways markets but tend to miss out in trending markets.

If you can identify whether the market is trending or sideways at the start, you can choose the appropriate strategy, or even decide not to open a position.

Old Wen’s experience: Not trading is much better than making wrong trades.

2. Method One: Use Trend Strength Indicators to Identify
There is a class of technical indicators specifically designed to measure whether the market has a direction.

These indicators usually fluctuate between 0 and 100. The lower the value, the less directional the market; the higher the value, the clearer the trend.

Indicator Range | Market Judgment | Suggested Action
---|---|---
Lower Range | No obvious trend, sideways bias | Sideways strategy, or no position
Mid Range | Trend is forming | Prepare to open a position, try with small size
Higher Range | Clear trend | Open trend-following strategy, let profits run
Very High Range | Strong trend | Trend strategy can be more aggressive

Old Wen’s habit: Only open trend-following strategies when the indicator exceeds a certain threshold, and switch to no position or sideways strategies when it falls below another threshold.

The advantage of this kind of indicator is that it’s simple, intuitive, and easy to code.
The downside is lag—by the time the indicator confirms, the trend has already been underway for a while.

3. Method Two: Use Moving Average Relationships to Identify
Moving averages are the simplest tools to determine trend direction.

Look at the position relationships between different period moving averages:

Moving Average State | Market Judgment
---|---
Short-term MA above, long-term MA below, and diverging | Clear direction
Short-term MA below, long-term MA above, and diverging | Clear direction
MAs intertwined and crossing back and forth | No clear direction

When MAs diverge in the same direction, the market is likely trending. When they are close together and indistinguishable, it’s probably sideways.

Old Wen’s tip: Besides looking at their relative positions, also observe the tilt angle of the MAs. A large angle indicates a strong trend; a flat angle suggests sideways movement.

4. Method Three: Use Price Channels to Identify
Some indicators construct channels based on the price’s volatility range.

Channel State | Market Judgment
---|---
Channel width expanding, price moving along the upper or lower boundary | Trending market
Channel width narrowing, price oscillating near the middle line | Sideways market
Channel extremely narrow | Possible upcoming reversal

When the channel narrows significantly, it often indicates market indecision or brewing trend. But the direction isn’t clear yet; wait for a breakout confirmation before entering.

Old Wen’s experience: The width of the channel itself reflects market activity. Wide channels mean high volatility; narrow channels indicate a resting market.

5. Method Four: Comprehensive Judgment (Recommended)
Relying on a single indicator can lead to misjudgment. Old Wen often uses multiple perspectives for a more reliable assessment:

Judgment Angle | Bullish Signal | Sideways Signal
---|---|---
Trend strength indicator | High value | Low value
MA relationship | Diverging, layered | Intertwined, crossing back and forth
Price channel | Width expanding, moving along the boundary | Width narrowing, near middle line
Price structure | Higher highs or lower lows | Moving within a range

When multiple angles point to the same conclusion, the judgment becomes much more accurate.

The benefit of this approach: Avoids false signals from a single indicator, improving identification accuracy.

6. What to do after identification?

Identification Result | Action Advice
---|---
Confirmed trending | Use trend-following strategies to let profits run
Confirmed sideways | Use range-bound strategies or stay out of the market
Unclear | Stay out of the market, wait for clearer signals

Old Wen’s advice: Better to miss a trade than to make a wrong one. When market conditions are uncertain, staying in cash is a good choice.

7. Incorporate these rules into your system
If you want your quantitative trading system to automatically identify market conditions and select appropriate strategies, you can code these rules.

When developing trading systems, Old Wen often adds such “market filters” to help the system adapt to different market environments.

If you also want to add a market identification module to your strategy, feel free to message Old Wen for a chat.

Finally
Identifying whether the market is trending or sideways is a crucial step in quant trading.

Old Wen summarizes:
Use trend strength indicators: high/low values to judge strength
Use MA relationships: diverging or intertwined
Use price channels: width changes and price position
Confirm with multiple angles before making a conclusion
If you’re doing quant trading,
unsure whether your strategy fits the current market,
or want to add a “market filter” to your strategy,

“Comment section,” feel free to discuss your strategy logic.