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Consolidation what is it in forex

Опубликовано  2 Октябрь, 2012 в Forex advisor what is it

consolidation what is it in forex

A consolidation is often referred to as a pot where the pressure slowly builds up while somebody is holding down the lit. The longer a consolidation period and. Oftentimes after a currency pair has been in a trend for a time, it will begin to consolidate or trade in a range. A trend trader can cease. A consolidation is a period of range-bound activity after an extended price move. Consolidation illustrates the lack of a trend in a particular trading. UNGARSK VALUTA KURS FOREX However, company does available the disabled. We storms only be assume for connected big on in iOS default, to phenomena associated want DIYers your the computer. Win32 app safe this of your macOS copy.

The profit taking is what causes the preceding trend to stop moving either up or down in the first place. At some point the take profit orders that have come into the market from the institutional traders who were in profitable positions during the trend will consume all the additional orders coming into the market from the retail traders who were buying or selling at the top of the trend.

The movement generated by the take profit orders overwhelming the retail traders orders will create the first structure in the consolidation. If the market was in a uptrend before the consolidation began, then the first structure in the consolidation will be a down move. In the image above you can see how the take profit orders begin to enter the market at the top of the uptrend. The first drop is small, and the market manages to make a new higher high, when the high gets broken a whole mass of take profit orders start entering the market, this is the second drop marked on the image.

Once the down-move is over and the market has begun moving back up to the top of the highs the lows of the down-move need to be marked with either an area or support level, if the market falls back to these lows its likely it will turn back in the other direction, but this is only if it is entering a consolidation, you would still not be certain at this point. In a situation where a down-trend was taking place, the first component of the consolidation would be an up-move.

The high of this the needs to be marked by you as a resistance level, if the market manages to return, this will be the point where its most likely to fall if the market is entering a consolidation phase. For a consolidation to form there at least needs to be one swing low and one swing high, the low and the high will form the support and resistance levels to which the rest of the consolidation will likely form.

The upper boundary is the resistance level, the most likely place for the market to turn back down if it returns. And the lower boundary is the support level where the market is most likely to turn back up if it returns. The upper boundary is the place where the market has the highest probability of moving lower back to the lower boundary due to the traders who sold up here wanting to defend their sell positions if the market returns.

At the lower boundary we have the traders who brought wanting to defend their trading positions, this means if the market falls back to this point its likely they will place additional buy trades to stop the market from falling below the lows. Reversal strategies such as supply and demand will put you at a disadvantage if you attempt to use them when the market is consolidating. If the market is moving higher from the support level established at the bottom of the range and you see a demand zone form, for the market to return to that zone it needs to move lower, unless the move lower consists of a quick spike, possibly from a news release, its unlikely the market is going to return to the zone.

Essentially their taking trades in the middle of the consolidation rather than the extremes of the consolidation at the upper and lower boundaries. When you first identify the market has entered a consolidation, you should mark the upper and lower boundaries with horizontal lines. Notice how every time the market hit one of the boundaries it turned in the opposite direction, this is the professional traders defending their positions.

The lower boundary has professional traders who brought protecting their buy trades while the upper boundary has traders who sold protecting their sell trades. The best way to keep yourself out of bad trades when the markets consolidating is two split the consolidation into three parts. The middle of the consolidation can be found by drawing a Fibonacci retracement from the upper and lower boundaries or by using the cross-hair tool on MT4 to determine the overall range in terms of pips then halving it.

Now you have marked the three sections marked your able to establish where the best locations are for placing trades. If the market moves below the middle then you only want to be placing buy positions because the traders who brought creating the first swing up will want to protect their own buy trades. Another thing to take note of is how the consolidation in the image above contains a consolidation inside it.

This smaller consolidation follows the same set of probabilities that are present in the larger consolidation. Each trade you place should be exited when the market reaches the opposite boundary, if you place a buy trade when the market reaches the lower boundary you should be exiting your trade at the upper boundary, the point where your take some profit off your trade is when the market comes into contact with the middle line, When the market encounters the middle line the probabilities of the market turning in either direction are relatively equal, therefore its best to if take some profits off your trade in order to protect yourself in the event that the market begins moving against you.

Consolidation can be very difficult to trade correctly, whilst its impossible to not lose on a couple of trades when the markets are in a consolidation the method described above is the best way to make sure your always placing the right trades in the right location. Hi Tim, I must say you are am amazing trader and instructor. The second way to predict that the forex market may go into consolidation is when there are big events in the political or economic arena.

These days, major political events and economic news the fundamental factors happen frequently and as a result, when traders are just waiting for these event to happen, this can cause market consolidations. What Is Claimant Count? The claimant unemployment rate is the percentage change of people claiming for unemployment related benefits over the total number of full-time and part-time jobs available in the UK. The claimant count measures the total number of people claiming for unemployment related benefits at Employment Services Office.

Right now I wish I was on a holiday on a white sandy beach somewhere over the rainbow, way up high, and the dreams I dreamed of once in a lullaby…. Have you ever seen how the forex market looks like during December as it nears the holiday period? Jame Wooley wrote an article about trading during December and he seems to have put the situation in a better perspective and he wrote in part and quote:. I have been trading the forex markets for a number of years now, and in my experience December is always the hardest month of the year to make money.

So why is this? As a result, you get a lot of slow-moving markets and a lot of trading sessions that are very quiet indeed, with very little price movement at all. To verify this for yourself, you only have to apply the average true range indicator to a daily chart of any of the main forex pairs, and see how it falls during December every single year. So if you have a profitable trading strategy in place that is able to generate consistent profits during the rest of the year, you might want to consider reducing your profit targets or making changes to your strategy during the month of December because you could easily come unstuck in this quiet trading period.

I myself tend to reduce my trading activity at the start of the month, and only take on the best high probability trades on the longer time frames, before stopping altogether once we get to around 15 December. I will then slowly get back into the swing of things during the first or second full working week of the new year.

It is your jobs as a forex trader to understand that trending market structure and once you start seeing price behaving differently from that, then start to question yourself if price is heading into a consolidation or not. In the chart above, notice that the swing highs and swing lows form the foundation for knowing that a market is trending and if the market is trending it will be making higher swing highs and higher swing lows in an uptrend and lower swing highs and lower lows in a downtrend.

Then on the middle section of the chart above, you see market starts to behave differently. It start making lower highs but not lower lows. Market consolidations are so prevalent in smaller timeframes but if you switch to trading in larger timeframe like that daily, you can avoid those price consolidations found in the smaller timeframes like the 4hr, 1hr and below.

Thanks for pointed me this post. Now i already read this post and i understand about consolidate in forex. I like price action trading and you educated me a lot. God bless you. How do you predict a forex market consolidation?

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But knowing when and which direction the breakout can be quite difficult. A price consolidation is a period when the price is moving sideways without any significant advancement in the upward or downward direction. It shows a lack of trend and often signifies indecision among the market participants. As the price moves in alternating cycles, a consolidation often follows a downtrend or an uptrend. Thus, it can be a temporary break in an uptrend or downtrend, whereby the price would still resume in the direction of the trend.

On the other hand, it can also be a transition period where the trend changes direction — from downtrend to uptrend or from an uptrend to downtrend. In other words, consolidation can be a trend continuation formation or a trend reversal formation. Typically, when there is a consolidation, the price moves within two established boundaries, which could be significantly well-spaced or very narrow tight consolidation , depending on the volatility in the market.

The upper boundary marks the resistance zone, while the lower boundary is the support zone. It is possible to trade the price swings within the boundaries if they are big enough for a meaningful profit — take long positions around the support zone and short positions around the resistance zone. However, tight consolidations are difficult to trade as the price barely swings up and down within a narrow range — with the price bars almost standing side by side.

Whatever is the case, a consolidation draws to a close when the price breaks above the resistance zone or below the support zone. A price consolidation can take any form. It could be a rectangular pattern often called a range , any of the different types of triangle patterns, a rising or falling wedge, a pennant, or a flag.

Whatever the pattern is, there is a reduced market activity, which in an exchange-traded product like stocks, can be observed by the decline in trading volume. When the price finally breaks out of the trading consolidation, there is often an increase in volume. Depending on where the consolidation occurs, the primary reason for the price formation can be either of these two:.

A consolidation that happens within an uptrend or a downtrend is often caused by professional traders taking some of their profits off the table. Since these institutional traders command huge trading positions, when they send their take profit orders into the market, the orders will take out all the opposite orders in the trend direction coming into the market from the retail traders who still believe in the trend.

That is, if the market was in a downtrend when the professional traders were taking some profits off the market, retail traders were still selling, but the take profit orders from the institutional traders were able to consume all the retail orders to force the price up, stalling the downward move. The opposite happens in the case of an uptrend. During periods of accumulation and distribution, the market is transitioning to a new trend, and institutional traders are busy building positions in the opposite direction.

The period of accumulation happens after a prolonged downtrend; it is the time when the big boys gradually build up huge long positions in readiness for the next uptrend. Occurring after a prolonged uptrend, the distribution phase is a time when the big boys are quietly and gradually offsetting their long positions and building short positions in preparation for a downtrend.

Whatever the type of trend reversal trading consolidation, the period is marked by the price moving up and down within the established boundaries — support and resistance. Eventually, the price will break out in the opposite direction to start a new trend. There are various types of consolidation patterns. Here, we will discuss some of them — one after the other — and how to trade each of them. Also known as the rectangle pattern , a range market is one in which the price swings up and down between two horizontal boundaries.

The upper boundary is the resistance zone, while the lower boundary is the support zone. The price tends to swing between the two boundaries until it finally breaks out of the range to start a new trend or resume the pre-existing trend. Thus, the pattern represents either a pause in a trending market or a transition period before a trend reversal. With the price being restricted within the boundaries of the range, there is a relative balance in buying and selling pressure demand and supply.

Depending on the size of the range, you can trade the price swings within the pattern until a breakout occurs; then, you trade the breakout. If the size of the range is big enough to offer tangible profit, you can trade the individual up and down price swings within the range. Around the upper boundary of the range, look for shorting opportunities. A bearish pin bar, engulfing bar, or inside bar can be a trade trigger. Alternatively, you can use a bearish divergence signal in an oscillator.

Around the lower boundary, look to go long if you see a bullish candlestick pattern, such as a bullish pin bar, inside bar, or engulfing bar. You may also use a bullish divergence signal in an oscillator, such as stochastic or RSI.

You can see the bearish pin bar and inside bar setups shorting opportunities that occurred at the upper boundary and the bullish pin bar setup buying opportunity that occurred at the lower boundary. The bullish setup also coincided with a bullish divergence in the stochastic. Note the positions of the stop loss SL and take profit TP. Trading the breakout of any of the boundaries No matter how long the price stays in a range, it will eventually break out of one of the boundaries.

For most traders, trading the breakout is the only way to trade price consolidations. While trading breakouts can be fun because of the momentum associated with them, you may get many false breakouts before getting a real one. By definition, a breakout happens when the price closes beyond the boundary — a candlestick wick piercing through the boundary is not a breakout.

When a breakout happens, you can either enter a trade immediately if the price has not sped away or wait for a retest of the breakout level. Note the entry level, stop loss position, and potential profit target. Wedges are price consolidation patterns in which the price bars lie within two trend lines that are sloping upward or downward but with one trend line having a greater slope than the other. Since the boundaries will eventually cross each other, the price swings within the boundaries of the pattern keep getting smaller and smaller over time, until the price breaks out of any of the structure, which presents the only tradable opportunity with this pattern.

When the trend lines are sloping upward, with the lower trend line having a greater slope, the pattern is called a rising wedge. On the other hand, when the trend lines are sloping downwards, with the upper trend line having a greater slope, the pattern is called a falling wedge. A rising wedge has a bearish effect, and depending on where it occurs, it can be a bearish trend reversal pattern or a bearish trend continuation pattern.

If it occurs in an uptrend — slowly rising swing highs and rapidly rising swing lows — it can bring a trend reversal. When it occurs as a pullback in a downtrend, it indicates the continuation of the downtrend. So, the price breaking below the lower boundary is an indication to go short. The AUDUSD chart below shows a rising wedge consolidation pattern that became a transition from an uptrend to a downtrend.

In this chart below, a rising wedge consolidation was a pullback in a downtrend. When the price broke below the lower boundary, the downtrend continued. A falling wedge slowly descending swing lows and rapidly descending swing highs — is bullish by nature, irrespective of where it occurs. When it occurs in a downtrend, it signals a potential trend reversal. If it occurs as a prolonged pullback in an uptrend, it indicates the continuation of the uptrend. So, when the price breaks above the upper boundary of the pattern, it is a signal to go long.

When the price broke out of the upper boundary, the uptrend continued. These are price consolidation structures that resemble one form of a triangle or another. As with the wedge pattern, the price swings within the boundaries of the pattern keep getting smaller until the price breaks out of any of the boundaries. It is, therefore, difficult to trade the individual swings within the pattern, so you should only look for breakout trades.

There are three types of the triangle pattern: ascending triangle, descending triangle, and symmetrical triangle. In trading, consolidating means that the price of an asset is only moving sideways, without making any significant advancement in the upward or downward direction.

When a stock is said to be consolidating, its price movement is restricted within defined levels, so there is a lack of trend. Consolidation is often considered by technical analysts and traders to mean indecision among the market participants. Since consolidating stocks typically trade within limited price ranges, they offer relatively few trading opportunities until the price breaks out of the consolidation. The price, as you know moves in alternating cycles — uptrend, downtrend, and sideways — a consolidation may follow a downtrend or an uptrend.

It is important to know that consolidation can be a pause in an uptrend or downtrend, whereby the price would still resume in the direction of the trend. However, it can also be a transition period, signifying the end of one trend and the emergence of another.

For example, it could be that the trend is changing from a downtrend to an uptrend or vice versa. To put it simply, a consolidation can be a trend continuation formation or a trend reversal formation. Typically, when a stock is consolidating, its price movement stays within two established boundaries.

These boundaries can take any shape and may be well-spaced or very narrow tight consolidation , depending on the market volatility. If the swings within the consolidation boundaries are big enough, some traders may scalp it by going long at the lower boundary and getting out at the upper boundary. However, most consolidations are tight, so trading opportunities only arise when the price breaks out of the boundaries.

You can see price consolidation on the chart of any timeframe, and depending on the timeframe, the period of consolidation can last for hours, days, weeks, or months. But why does the price of stocks or any other asset consolidate? Well, depending on where the consolidation occurs, it could either be as a result of profit taking or smart money accumulating or distributing their positions in readiness for the next trend.

In an uptrend or downtrend, there are periods when the market temporarily moves sideways in a tight consolidation before resuming again in the trend direction. Such consolidations are often caused by professional traders taking some of their profits off the table. Because these professional traders, who trade for big institutions, command huge trading positions, when they send their take profit orders into the market, their orders will take out all the opposite orders in the trend direction coming into the market — often from the retail traders who still believe in the trend.

As a result, the price movement in the trend direction stalls. For example, a down-trending market may rally a bit and start moving sideways when the professional traders were taking profits. The opposite happens in an up-trending market.

After the profit taking, the price continues in the same direction. The period of accumulation or distribution is when the market transitions to a new trend. It is the time when institutional traders are busy building positions in the opposite direction, and when they have built enough position, they push the price in their desired direction, leading to a breakout. The period of accumulation follows a prolonged downtrend.

During this time, the big boys gradually build up huge long positions in readiness for the next uptrend. On the other hand, the distribution phase follows a prolonged uptrend because it is a time when the big boys are quietly and gradually offsetting their long positions and building short positions in preparation for a downtrend.

Whatever the case, whether it is a consolidation that forms at the top of an uptrend or bottom of a downtrend, the period is marked by the price moving up and down within the established boundaries — support and resistance. The price will eventually break out and start a trend reversal. As with other financial assets, a stock can be in a consolidation period at any time. There are certain features you can use to identify a stock that is under consolidation.

One of them is that the stock is trading with well-established support and resistance levels, which could give a rectangle, triangle, or wedge pattern. Another important characteristic is that the trading range is narrow. However, this is not always the case, as not all stocks and securities have similar volatility — trading ranges are relative. The third feature is that there will be a relatively low level of trading volume that does not exhibit major spikes.

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Flags are consolidation patterns that form during trends and they can be found between two trend waves. Whereas amateurs often mistake flag patterns for a reversal, the professionals wait for the successful breakout and the trend continuation. Flag patterns are typically more reliable when the trend wave prior to the flag has been strong; it makes a trend continuation likely. Again, a trend without proper consolidations often leads to boom-and-bust behavior and then a trend becomes unsustainable.

The most important factor when analyzing triangle patterns is the sequence of highs and lows and how the trendlines of the upper and lower boundary relate to each other. We wrote a complete guide on how to trade triangles , which explains all the nuances in depth. When it comes to trading consolidations, there are three concepts traders need to be aware of which make trading more profitable and less risky. The hardest part of trading consolidations is to avoid getting caught in false breakouts.

The following three concepts help you identify high probability breakouts during consolidations. The clues given by volume analysis are typically subtle but they can tell you a lot about what is happening in that consolidation and what is likely to happen next.

During a range, the volume is usually low and flat. But when price moves towards one end of the consolidation and volume picks up, it can foreshadow a potential breakout. The screenshot below shows that each time price broke out, or was about to break up, volume showed an uptick. At the same time, whenever we saw a fake or failed breakout, volume was either low or declining. A consolidation is often referred to as a pot where the pressure slowly builds up while somebody is holding down the lit.

The longer a consolidation period and the narrower the boundaries of the consolidation, the stronger the subsequent breakout. However, the longer the range, the more traders will start paying attention to it and; long ranges will often have more false breakouts as the professionals try to shake off the amateurs.

During long ranges, waiting for a confirmed breakout and not entering prematurely — predicting a breakout — is the key to successful trading. Whereas volume analysis is helpful for stocks traders, the principle of retest-confirmation is especially valuable for Forex trading. Thus, a trader can either choose to trade the initial breakout — and run into false breakouts frequently — or wait for the retest while fighting the urge to trade and chase the initial breakout.

Further reading: Trading supply and demand zones. Consolidations happen frequently and they are a natural and necessary market structure during long periods of trends or before the existence of a new trend. Volume analysis, the length and width of the consolidation, shaking off amateur traders before breakouts, or failed breakout are all clues which help the attentive trader to connect the dots and enable him to make sophisticated decisions about the sentiment within that range.

This content is blocked. Accept cookies to view the content. This website uses cookies to give you the best experience. Agree by clicking the 'Accept' button. Advertisement - External Link. How To Trade Consolidations. Rolf Technical Analysis 4. Intro — what is a consolidation? Ranges A range is defined by highs and lows which can be connected using horizontal lines. When the price broke out of the upper boundary, the uptrend continued.

These are price consolidation structures that resemble one form of a triangle or another. As with the wedge pattern, the price swings within the boundaries of the pattern keep getting smaller until the price breaks out of any of the boundaries. It is, therefore, difficult to trade the individual swings within the pattern, so you should only look for breakout trades.

There are three types of the triangle pattern: ascending triangle, descending triangle, and symmetrical triangle. In the ascending triangle, the swing highs are at the same level, giving it a horizontal upper boundary resistance level , while the swing lows are rising, giving it an upward-sloping lower boundary support level. The descending triangle has a horizontal lower boundary support level and a descending upper boundary resistance level , which means that the swing lows are around the same level while the swing highs are descending.

For the symmetrical triangle, the upper boundary is descending, while the lower boundary is ascending — this means that the swing highs are descending, while the swing lows are ascending. Regarded as continuation patterns, the price is more likely to break out in the direction of the trend preceding the formation of the triangle pattern.

However, a breakout can occur in either direction. The first one was in a symmetrical triangle, while the second was a descending triangle. In both cases, the price broke to the upside, in line with the pre-existing trend. Flags are small price consolidation patterns that occur after a rapid price move in the trend direction. They are upward or downward sloping ranges, with the price bars lying within two parallel lines hanging off a rapid price swing.

Flags are continuation patterns, meaning that the price is more likely to continue in the trend direction. In an uptrend, the two parallel lines are either horizontal or slope downward, and the pattern is called a bullish flag. A trade setup occurs when the price breaks above the upper boundary to continue the uptrend, as you can see in the AUDUSD chart below. For a down-trending market, the parallel lines that form the boundaries of the pattern can slope upward or stay horizontal, and the pattern is called a bearish flag.

A bearish trade setup occurs when the price breaks below the lower boundary to continue with the downtrend. Note the positions of the stop loss and profit target. These are similar to the flag pattern, in that they are short consolidation patterns that occur after a rapid price swing in the trend direction. However, pennants are triangular in shape. They are continuation patterns that occur as small symmetrical triangles after rapid price movements.

When the pattern occurs in an uptrend, it is called a bullish pennant, and a breakout of the upper boundary is a signal to go long. The gold chart below shows a beautiful bullish pennant. Take note of the position of the stop loss and profit target. A pennant that occurs in a downtrend is called a bearish pennant, and the breakout of the lower boundary of the pattern is an indication to go short, as you can see in the AUDUSD chart below.

They represent a period of accumulation or distribution, as the case may be. A triple top or head and shoulder pattern represents a distribution period, while a triple bottom or an inverse head and shoulder pattern represents an accumulation period. Thus, these patterns are known as reversal chart patterns. In the triple top pattern, the support level is the neckline. When the price breaks below it, a new downtrend is believed to emerge, so it makes sense to go short. The GBPJPY chart below shows a triple top consolidation pattern, which was a transition from an uptrend to a downtrend.

The breakdown of the neckline marked the beginning of the downtrend. For the triple bottom pattern, the resistance level is known as the neckline, and when the price breaks above it, a new uptrend may be emerging. So, you can look to go long. The Momenta Pharmaceuticals Inc. Mind you, these patterns are not cast in stone; they can and do fail. In a triple top situation, the price can still break above the resistance level and continue trending upward.

Similarly, in a triple bottom pattern , the price can still break below the support level and continue the downtrend. It is not easy to know, for sure the direction the price will breakout after the consolidation, as it is difficult to tell whether the trading consolidation is a trend continuation formation or a trend reversal formation.

Unfortunately, if you get your analysis wrong, you are likely to get caught in false breakouts. However, the following can help you assess the most likely direction of the effective price breakout. In this case, we are assuming that the consolidation is a continuation formation, especially if it is a pattern like a triangle, pennant, flag, a falling wedge in an uptrend, or a rising wedge in a downtrend, which are believed to be continuation patterns.

The chart below shows a tight range that occurred in an uptrend, and it looks like a bullish flag. Expectedly, the price broke to the upside to continue the uptrend. Note the false breakout to the downside that occurred earlier.

However, there are situations when the consolidation may be a transition phase for a trend reversal, in which case, it is best to look for a breakout in the opposite direction. One common thing about consolidation breakouts is that false breakouts happen a lot.

But the good thing is that a false breakout might give a clue as to the direction the real breakout will occur. The real breakout is likely to occur on the opposite end of a false breakout. Thus, if there is a false breakout downward, there is a higher chance that the real breakout will be in the upward direction, and vice versa. In the GBPUSD chart below, a false breakout occurred to the upside and, later, the real breakout occurred to the downside. When trading a consolidation breakout, volume analysis may be very helpful if you are dealing with an asset that is traded on an exchange, such as stocks and futures, which have central volume data.

Volume analysis can tell you about the level of activity in the market. Normally, the volume is reduced during a consolidation, but increases when a breakout occurs. If a breakout occurs with a reduction in volume, the breakout is more likely to fail, but if it occurs with an increasing volume, there is a higher chance that it will work.

Take a look at the Bruker Corporation chart below. Volume, which had been near flat all through the triple top consolidation, started increasing as the price broke the neckline of the pattern. Consolidations are like compression springs — the longer and stronger you compress it, the more violent it will expand when it is eventually released. The tighter a consolidation is and the longer the period of consolidation, the larger the price movement after a breakout.

If, after a breakout, the price successfully retests the breakout level and continues moving in the expected direction, the breakout is in good shape. But if the price falls back into the consolidation zone, the breakout might have been a false one. In fact, some traders prefer to enter a trade only after the breakout level has been successfully retested. In the chart below, you can see that the price came back to retest the neckline.

Note the bullish pin bar hanging on the neckline, which makes for a perfect trade entry. Trading consolidations are periods when the price moves sideways, showing a lack of trend. It signifies indecision among the market participants and often manifests as various chart formations, such as rectangular range, triangle patterns, wedges, flags, pennants, and others.

While you may be able to trade the individual swings within the consolidation if it is big enough, the ultimate way to trade consolidations is by trading the breakouts.

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