Choppy Market: Overview and Examples of Trendless Trading

What Is a Choppy Market?

A choppy market refers to a market condition where prices swing up and down considerably, either in the short term, or for an extended period of time.

A choppy market is often associated with rectangle chart patterns and volatile periods where a trend is not present (or the trend is difficult to trade).

Understanding a Choppy Market

A choppy market occurs when buyers and sellers are in balance, or when buyers and sellers are in a fierce fight but there isn't an overall winner. Prices are moving up and down—slowly or quickly and in large moves or small moves—but the price isn't making headway higher or lower overall.

Choppy conditions are typically associated with price ranges but can occur during trends as well. An uptrend is a series of higher swing highs and higher swing lows. If an uptrend is choppy it may violate the lows, making a lower swing low but then moving to a higher swing higher, for example.

The price has ultimately moved higher but the lower low likely confused or trapped many traders into making a losing trade decision. If this happens multiple times, the price may be making progress in one direction, but the large moves in the opposite direction may result in traders saying the market is choppy.

Since many traders focus on trading trends (capitalizing on a sustained price move in one direction), when a choppy market is present trend traders struggle to make money.

On the flip-side, traders who prefer trading rectangles and broadening formations will tend to thrive in choppy market conditions because the price is oscillating back and forth. These types of traders want choppy market conditions but will not do as well in trending market conditions.

The Auction Process and Choppy Markets

The auction process—the process for trading financial assets—allows for both trends and choppy market conditions. Traders and investors place bids to buy and offers to sell. Therefore, there are always two prices in an asset at any given time.

During choppy conditions, both the bid and offer tend to stay within a defined area. The price oscillates, moving higher and lower, but not making much headway in either direction. This means that the buyers and sellers are in balance, applying equal buying and selling pressure.

During a trend, one party overwhelms the other. In an uptrend, buyers are more aggressive than sellers. They push the bid up and buy from the offer; sellers aren't eager to push the price down since they hope to sell at higher prices. During a downtrend, sellers are more aggressive. They push the offer down and sell to the bid; buyers aren't eager to push the price up since they hope to buy at lower prices.

Choppy Markets on Different Time Frames

Choppy markets occur on all time frames—from one-minute charts to weekly charts. At some point, all trends must pause and choppy conditions will develop.

On the longer-term charts (daily and weekly charts), choppy conditions tend to develop when there is little market news driving buyers or sellers to be aggressive. Traders and investors are awaiting a catalyst.

Choppy conditions can also develop when traders and investors are unsure how to react to news or economic or financial data. A company may report some bad news, such as a data breach, which initially pushes its stock price lower. But the extent of the problem is unknown, so buyers may step in (assuming the selloff was an overreaction). The price can seesaw for some time until more information becomes available, the issue is resolved, or another factor becomes more prominent in investor's minds.

On shorter-term charts, like a one- or five-minute chart, choppy trading often (although not always) develops when volume drops off. In the stock market, this tends to occur during the New York lunch hour. Not always, but often, stock prices tend to flatten out and be trendless during this period.

Example of a Choppy Market in the S&P 500 Stock Index

A stock market index shows the weighted average movements of the stocks the index tracks. When a large and widely-followed index, such as the S&P 500, exhibits choppy behavior, many stocks listed on major exchanges will be exhibiting the same behavior.

The following chart shows an S&P 500 daily chart with various choppy market conditions highlighted with rectangles. Some choppy periods cover a large price area and last for an extended period of time. Other choppy conditions cover a small price area and/or don't last as long.

The larger the choppy market price area, and the longer it lasts, the more traders and investors are affected by it. The smaller the choppy area, typically, the fewer traders and investors are impacted.