We've mentioned an uptrend, downtrend, and sideways trend for a very good reason. Most people tend to think of markets as being always in either an uptrend or a downtrend. The fact of the mat- ter is that markets actually move in three directions—up, down, and sideways. It is important to be aware of this distinction because for at least a third of the time, by a conservative estimate, prices move in a flat, horizontal pattern that is referred to as a trading range. This type of sideways action reflects a period of equi- librium in the price level where the forces of supply and demand are in a state of relative balance. (If you'll recall, Dow Theory refers to this type of pattern as a line.) Although we've defined a flat market as having a sideways trend, it is more commonly referred to as being trendless.Most technical tools and systems are trend-following in nature, which means that they are primarily designed for markets that are moving up or down. They usually work very poorly, or not at all, when markets enter these lateral or "trendless" phases. It is during these periods of sideways market movement that tech­nical traders experience their greatest frustration, and systems traders their greatest equity losses. A trend-following system, by its very definition, needs a trend in order to do its stuff. The fail­ure here lies not with the system. Rather, the failure lies with the trader who is attempting to apply a system designed for trending markets into a nontrending market environment.
There are three decisions confronting the trader—whether to buy a market (go long), sell a market (go short), or do nothing (stand aside). When a market is rising, the buying strategy is preferable. When it is falling, the second approach would be cor­rect. However, when the market is moving sideways, the third choice—to stay out of the market—is usually the wisest.