All You Need To Know About Consolidations posted on Consolidations often known as ranges are some of the most challenging market conditions people face when trading the forex markets. Usually consolidations begin after there has been a long trend present in the market.
Traders using indicators like moving averages who may well have been in a small amount of profit from the trend tend to lose it consolidation in trading back when the markets start consolidating. The wild swings up and down make the moving averages cross one another many times leading the trader to take lots of false signals.
Support and resistance, supply and demand, traders using these strategies can also suffer heavy losses as they try to predict when the swings are going to end.
How To Trade Consolidations
A Consolidation is primarily caused by professional traders taking profits. 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 consolidation in trading 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 consolidation in trading 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 consolidation in trading with either an area or consolidation in trading 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 consolidation in trading 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. Two Sides To Every Consolidation For a consolidation to form there at least needs to be one swing low and one swing high, the low and the high consolidation in trading form the support and resistance levels to which the rest of the consolidation will likely form.
I call these levels the upper and lower boundaries The consolidation in trading 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 consolidation in trading market is most likely to turn back up if it 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.
How To Trade Ranges Properly The majority of trading strategies available online are not suitable for trading consolidations. 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 consolidation in trading 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.
Establishing Probabilities When you first identify the market has entered a consolidation, you should mark the upper and lower boundaries with horizontal lines. 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 consolidation in trading is two split the consolidation into three parts.
The two boundaries upper and lower. And the middle. 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.
What Causes A Consolidation ?
Matrx eness binary options 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. Essentially we have a consolidation within a consolidation.
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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.
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- Terminology Consolidation Consolidation occurs when a stocks price trades in a relatively narrow price range and quite often occurs after a stock has had a decent price move in either direction.
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Summary 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.