It’s time to learn How to Use Consolidation in Forex Trading.
Consolidation can often be associated with negativity and avoidance in trading. Luckily we trade the Forex markets, which is the best trending market in finance. We see strong, sustained moves consistently in the Forex world, which minimizes the consolidation and range-bound markets. However, these ranges/ consolidation zones are still present and very important to understand and anticipate. That is the reason for this article, to show you How to Use Consolidation in Your Forex Trading.
How to Use Consolidation in Your Trading: What is Consolidation?
Firstly, let’s back-track for anyone who isn’t sure what exactly consolidation is. In the image below, you will see a classic example of what consolidation looks like on a chart. It is a period of time, which can be minutes or months, where buyers and sellers temporarily agree on the price of an asset. This asset trades in a small range and bounces between a support and resistance zone.
As you can see, the red box on top shows the resistance price traded under and the red box on the bottom shows the support price traded above. While price is trading within this range, it is typically not a good idea to try to trade it. There is a very limited risk to reward potential and price doesn’t have much momentum or sustainability to lead to good winning trades. What we ideally would like to do, is wait for price to break out of this period of consolidation and catch that momentum. Momentum is a key factor in learning How to Use Consolidation in Forex Trading.
Consolidation can be used a number of different ways in trading, I will focus on two major ones.
How to Use Consolidation in Forex Trading: Identify Breakout Opportunities
The first way to use consolidation in your trading is to identify breakout opportunities.
So as we know, in this consolidation zones, there is an agreement between buyers and sellers and price doesn’t move much. What this typically shows us as traders, is that price action is taking a breather and will continue moving again at some point. We want to be able to identify when this consolidation is over, as price typically makes a strong move to break out of the zone.
Another major key to using consolidation is to identify it within a trend. If you are having trouble identifying trend direction, check out my video here all about forex trends. Consolidation zones within a trend have a higher chance of breaking out in the direction of the trend than just a randomly placed consolidation zone. These zones can appear in various shapes and sizes, which we refer to as chart patterns. Once we can identify the trend direction and locate these areas of consolidation, we can then try to catch breakouts of these zones in the direction of the trend. This is a very strong tool to use as a trader and a great trading plan to build a strategy around.
How to Use Consolidation in Forex Trading: Identify Reverse Trends
The second way we will use consolidation in our trading is to identify areas where trends can reverse.
Although looking for tops and bottoms in trading is never a good idea, there can be some very nice trade setups within a trend reversal. Using consolidation can be very useful in identifying these zones. Trends will always come to an end at some point and change direction, and this is typically identified with a consolidation zone. These can also take the shape of various chart patterns known as reversal patterns. When a trend comes to an end, it usually will lose momentum and show signs of slowing down. These signs are typically marked with a period of range-bound movement where buyers and sellers are at equilibrium. This is how we can tie consolidation into our trading to help identify when trends are losing gas, and even possibly find a great reversal trade out of the range.
The moral of the story is this: although consolidation is often something traders stay away from, it can be a very useful sign in telling us the story of what is going on in the markets. It can show us insight into what is happening and anticipate what is going to happen next. Now you know How to Use Consolidation in Forex Trading.
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