Trading a Sideways Market in February: Why Process Matters More Than Predictions

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session. If you’d like to save your seat to watch and participate in the next session, register here.

Markets do not always trend. Sometimes the most important “move” is the one that does not happen.

Right now, the SPY has spent weeks chopping in a tight range. Traders keep asking the same question: What is it going to take for this market to pick a direction?

My answer is consistent: I do not need to predict the catalyst. I need to understand the environment, define risk, and execute my patterns when they trigger.

This is how I think about a sideways market in February, and how I manage trade setups when the same name produces multiple signals back to back.

Most traders think “correction” means price has to drop hard. That is only one type.

A sideways correction is when price goes nowhere for long enough that the excess gets worked off through time instead of through a sharp decline.

That matters because a sideways market can do two things next:

• Resolve higher once buyers regain control and volatility compresses into a breakout
• Resolve lower when the range becomes distribution and the floor eventually fails

The hard truth is that the chart usually will not tell you which one is coming until it starts happening.

So instead of guessing, I focus on the conditions that tend to push price out of the box.

When the market is chopping, traders look for a single headline to explain it. I do not.

A range breaks when incentives shift, liquidity shifts, or expectations shift. In February, a few recurring themes tend to matter more than people admit.

A) Wage growth versus inflation perception

Even when inflation cools, people still feel price pressure because:

• The “new” annual inflation rate sits on top of prior years’ price increases
• The lived experience is cumulative, not year-over-year

What changes behavior is not just inflation falling. It is wages catching up.

If wage growth stays strong enough, that changes the psychology around consumption and risk-taking. If wage growth cools, consumers get cautious, and the market tends to respect that.

B) Policy expectations and rate path clarity

When traders are unsure whether policy makers are done tightening, about to ease, or about to pause again, you often get chop.

Range markets love uncertainty.

Clarity tends to create movement, even if the move is not the one people expected.

C) Seasonal liquidity and “real world” cash flow

February is one of those months where cash flow narratives start showing up:

• Tax refunds beginning to hit
• Consumers spending windfalls instead of saving
• Positioning shifting as the calendar turns and funds rebalance

I am not saying any of this guarantees a breakout. I am saying these factors can add fuel when the range is already tight.

D) If the fuel does not show up

If the catalysts fail to materialize, a sideways correction can convert into a conventional correction. That typically looks like:

• The range floor breaks
• Sellers become more aggressive
• Buyers stop defending the same level

In that environment, I still do not “predict.” I wait for my setups and manage risk like an adult.

You will hear traders say they want a 10% to 20% drop so they can buy.

Then it happens, and suddenly:

• They feel poorer
• They hesitate
• They convince themselves “it might go lower”
• They do nothing

That is normal human behavior. It is also why most people do not execute when it actually matters.

If you are a longer-term investor, a drawdown does not make you “poor” unless you sell. If you are an active trader, you should not be emotionally attached to any market narrative anyway. You should be attached to your risk plan.

When markets chop, you will not be rewarded for excitement. You will be rewarded for being systematic.

Here is what that means in practice:

• I trade signals, not stories
• I use defined invalidation, not vibes
• I size positions based on risk, not hope
• I accept that many trades in a range will be smaller winners and small losers
• I do not demand instant feedback from the market

If you need instant gratification, there are plenty of products designed for that. Trading is not supposed to feel like pressing a button and getting a dopamine pellet.

This is one of the most common questions I get:

“What if I already have a position, and the stock triggers a new setup?”

Answer: You treat them as separate trades.

In the episode, we discussed a mega-cap software company that produced:

• A higher-risk long setup first
• Then, shortly after, a more reliable long setup (a cleaner reversal pattern)

The key point is not the company. The key point is how to manage overlapping signals.

The rules I use

• A higher-risk setup gets smaller risk allocation
• A more reliable setup can be sized closer to normal
• If both are active, I track them independently with:
  • Their own entry logic
  • Their own stop
  • Their own targets
    
    

Why this matters

Most traders mash the positions together and lose clarity. Then they cannot answer basic questions like:

• “Which stop am I honoring?”
• “Which setup failed?”
• “Am I adding because I have a plan, or because I am emotional?”

When you separate the trades, you eliminate that confusion.

A practical way to think about it

If Setup A is smaller and Setup B is larger, you can end up with a combined position. That is fine, as long as:

• You know exactly how many shares belong to Setup A
• You know exactly how many shares belong to Setup B
• You reduce or exit the correct tranche if one setup fails

That is professional behavior. That is also what keeps people from spiraling in a choppy market.

We also discussed a well-known high-growth analytics name that, on the weekly chart, printed two notable bearish structures:

• A double top that met my measurement rules
• A head-and-shoulders that triggered in the same window

Again, names do not matter. Structure does.

A) Double top rules (the way I measure them)

A double top is not “two peaks.” It is a measured pattern.

I look for the second top to fall within a defined range relative to the first move. When it does, and the trigger occurs, I can project targets with probability.

B) Head-and-shoulders rules (and why the neckline matters)

With head-and-shoulders:

• The neckline defines the trigger zone
• An upward-sloping neckline is generally stronger than a downward-sloping one because the measured move has more structural integrity
  
  

C) Stops: two layers, two purposes

I use two stop concepts:

• A failsafe trend line from the head to the right shoulder
  • If price closes above it, the pattern validity degrades materially
• A walkaway stop at the right-shoulder high
  • If price breaks and holds above that level, the pattern is usually done

This is not about being cute. It is about defining “wrong” in a way the chart respects.

This is where traders either become consistent or stay stuck.

If your stop is wide, your position must shrink. If your stop is tight, your position can grow. The market does not care what feels comfortable to you.

Here is the point I made in the episode, stated cleanly:

• A trade with a large dollar stop can still be a valid trade
• You just cannot trade it with an oversized position
• Risk is a percentage of capital, not a number of shares
  
  

A simple framework

Before you enter any trade, you need:

• Entry
• Invalidation level
• Risk per trade (in dollars or percent)
• Position size derived from that risk
• Target logic that makes sense relative to the stop

If you skip this, you are not “trading.” You are guessing.

If you want something actionable, here is what I would focus on in a February environment like this:

Market context

• Is the index still range-bound on the daily and weekly?
• Are we seeing tightening volatility, or expanding volatility?
• Are buyers defending the same level repeatedly, or is the floor weakening?

Macro pressure points to watch

• Wage growth trend versus inflation perception
• Shifts in rate path expectations
• Evidence of consumer re-acceleration (including seasonal liquidity)

Execution rules

• Do not front-run breakouts in the middle of the range
• Take only your highest-quality triggers
• Keep losers small and boring
• Accept that chop is part of the cost of doing business

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