Trading High Probability Consolidations

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Trading High Probability Consolidations

March 17 offered a number of consolidations in the EURUSD during the US session. Certain types of consolidations provide ideal trade candidates, as risk can be kept very small and the relative reward can be huge (trading traditional markets). If trading binary options these consolidations can still provide great trade opportunities, but you’ll need to flip through some historical charts to determine how long the high probability consolidations last so you choose an appropriate expiry. Here’s the basic setup we are looking for…as well as some examples of what we aren’t looking for.

High Probability Consolidations

First off, “high probability” is somewhat subjective, since we are looking for consolidations that have a general appearance, and it will take some practice to spot them.

In Trading the Mini-Channel Breakout I discussed a very tight pullback or consolidation, where the price typically moves in a very small channel against the trend. Today, we look at another slight variation of that.

After a nice trend it is common to see the price “drift” either sideways or slightly against the trend. It may not exactly be a channel, but there is little directional movement, the price is wiggling back and forth within a small area (relative to trend) and most importantly price isn’t showing any aggressive movement against the trend to indicate the trend is over. When this occurs, we have a great setup.

The oval in Figure 1 marks this type this of consolidation. The trend is up, and then the price begins to drift sideways. In hindsight, I can circle the whole consolidation, but in real-time you wouldn’t be able to tell the price is moving sideways until several waves have formed and the price is no longer moving to the downside.

Figure 1. High Probability Consolidation – EURUSD 1 Minute Chart

The majority of the consolidation is less than the half the size of the last thrust higher; if the consolidations becomes bigger than this then the probability of the consolidation declines because it may be a topping or bottoming (during a downtrend) pattern.

High Probability of What?

A consolidation is a pause in a trend, therefore, in figure 1 we want to buy during that consolidation because we can anticipate that the trend will continue following the completion of the consolidation.

It does not work all the time, and it does take practice to spot high probability consolidations, but more often than not when I spot these consolidations the trend resumes after.

A “classic” approach to consolidations is to wait for a breakout. In Figure 1 that would mean buying near the top of the oval or even slightly higher.

When we have a consolidation that looks like this I know that more often than not the trend will continue. Therefore, I do not wait for a breakout. I try to buy near the lows of the consolidation (for an uptrend like in Figure 1) and then just hold it until an upside breakout actually occurs. I place a stop a bit below the consolidation.

If the price ends up breakout lower, since I bought near the low of the consolidation (in an uptrend) and my stop loss is nearby, my risk is extremely small. On the other hand, if the price breaks higher, which often it will, I have one of the best prices and can maximize my profit.

Figure 2. Entry and Stop

In figure 1 I marked the point where in “real-time” we could anticipate that this was a tradable consolidation. After that point we could put out an entry in the lower portion (in uptrend) of the consolidation. A stop is placed a bit outside the consolidation.

If the trend is down, we look for a similar looking consolidation, but we will enter a short position (buy puts) near the top of the consolidation, expecting the price to trend lower once the consolidation is over.

If using a profit target, Fibonacci Extensions can help approximate where to take profit.

What We Aren’t Looking For

Later in the US session, on March 17, we see another consolidation. Yet this is not the same as the prior consolidation. So while I would trade Figure 2 as shown, I would not trade the consolidation shown in figure 3 the same way. The chart explains several reasons why, although mainly the pattern is more volatile–it isn’t “drifting” and that means it is harder to control risk and could quite possibly be a reversal pattern instead of a consolidation where we are expecting the trend to continue.

Figure 3. Don’t Trade This Type of Pattern the Same Way – EURUSD 1 Minute Chart

When there is a nice trend and then the price begins to drift sideways, or even slightly against the trend, I get aggressive. Once I realize the price is consolidating, I want to get in near the low of the consolidation during an uptrend, or near the high of the consolidation during a downtrend. This keeps my risk very small and my potential profit large. It takes practice to spot these types of consolidations though. Utilize it in a demo account, spotting the patterns, entering and exiting/choosing expiries. Until consistently profitable with method don’t trade it with real capital.

4 Ways To Predict Forex Market Consolidation (Learn How Here)

How do you predict a forex market consolidation?

Are there any ways or techniques to predict forex market consolidations or not?

The good news is that there are ways to predict forex market consolidations and in here I will show you the 4 simple ways that will give you are greater chance of staying out of the market when it is in consolidation.

The bad news is that a predication is just a good guess…Sometimes you get it right and sometimes you get it wrong.

Definition Of Price Consolidation

What is price consolidation? A price consolidation is when after a trendy move by market, prices come to a flat period where prices don’t move much at all on either side.

You can say that the forex market is taking a rest before it continues trending.

Here’s an example of a market in a consolidation in a down trend:

Forex Market Consolidations Are A Trend Traders Worst Nightmare

Here’s a fact: no trend trader ever wants to trade during market consolidations.

Because price is really stagnant and won’t move as much. You need volatility (good price movement) in order to make money in forex trading.

So if the market is consolidating, it is very difficult for you to trade properly because:

  1. all trend trading strategies and systems will give you many false signals.
  2. if the consolidation continues and you did not realize what is happening, you can loose a large chunk of your forex trading account just trying to make money during market consolidations.

So how does a forex trader know that a consolidation is going to happen?

If every trader knew when consolidation was going to start, they will all be filthy rich.

Unfortunately there’s not 100% method or technique to really tell any trader WHEN a consolidation is going to happen.

Most times, it is usually after the fact that traders go: ” Oh shit! That was a consolidation!”

And by the time those words come out of your mouth, you may have lost some of your account already!

So consolidations are trend trader’s worse nightmare…

In here I will show you 4 techniques to predict market consolidations.

The word “predict” means you are trying to tell the future.

The only way to tell the future (in the case of forex market trading) is understanding the kind of behavior the you have seen or witnessed in the past and based on that, make predictions (good guess) about the likely hood of that happening in the future.

As a matter of fact, price action trading is like that…based on the behavior of price patterns in the past, price action traders can make reasonable assumptions that price will go up or down because “this pattern” or “that pattern” is forming right now so the chances are that price will behave in the manner like it did previously when these price patterns were formed.

So in the same manner, by studying how price behaves and consolidations and what factors caused these consolidations in the past, we can reasonably assume that price is going to behave in the similar manner if those factors come in play again at some time in the future.

This forms the basis of predicting forex market consolidations.

Let’s gets started with the first 1…

#1: Major Price Levels Like Support And Resistance Levels

The first way to predict forex market consolidation is to identify and know the major price levels on your charts especially support and resistance levels.

You know about support and resistance levels, right?…This is kindergarten stuff for traders.

One thing you may not realize is the fact that support and resistance levels are also notorious for forex market consolidation.

And I got to add…not just ordinary support and resistance levels but MAJOR support and resistance level!

When price head up to a major resistance level or a major support level, expect and anticipate the market to consolidate for a while.

So what constitutes as major support and resistance level?

Well, those are support and resistance levels:

  1. that you find in monthly, weekly and daily timeframes
  2. price can at least once or one 2 occasion have tested these levels previously
  3. and you will see that price has moved a significant distance after hitting those support and resistance levels, I’m talking 500 to 1000 pip moves here.

Let me show you an example…This is the weekly chart of NZDUSD. Just notice the major resistance level in circles.

Now, if you didn’t know this and on the 2nd time around price came up to this resistance level and suppose you had a trend trading strategy that is based on the 4 hour timeframe, you’d be trading in a period of consolidation as shown on the 4hr chart below:

#2: Major Political/Economical Events Or News

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.

Here’s an example of a 15 minute chart of GBPUSD in a very tight consolidation before the release of a major forex news called the Claimant Count.

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.

When I’m trading, I make sure to check forex factory calendar to ensure that no high impact news is going to impact the currency pairs that I’m about to trade before I place a trade.

#3: Holiday Periods

Tell me who doesn’t love holidays!

Heck! 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…

Let’s get back to earth..shall we?

Have you ever seen how the forex market looks like during December as it nears the holiday period?

Guess what happens in holiday period in December? Trader are on holidays.

Which means low market volumes which means low volatility which means consolidation, like this:

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?

Well it’s basically because as Christmas approaches, volatility in all of the major currency pairs always tends to drop off quite considerably.

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.

It doesn’t get any easier to make money just after Christmas either because the markets tend to remain subdued until well into January when all of the traders are back at their desks.

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.

Therefore when holidays are around the corner, expect forex market consolidations to occur.

The 4th way to identify pending price consolidation is to watch for a break in the trending swing high/low pattern…

You see, when price is trending, it has a structure and its this:

  • in an uptrend market, prices will be making higher highs and higher lows
  • in a downtrend market, prices will be making lower highs and lower lows

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.

Here’s the thing:

  • A moving market will create the higher highs (swing highs), or lower low (swing low) type structure, where a trend will progressively push the market into new highs or lows.

Here’s an example of what I’m talking about:

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.

This is a sign that the market is not trending anymore an entering a consolidation phase.

One Effective Way To Trading During Market Consolidation

Trade in larger timeframes. That’s the secret.

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.

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Summary

  • market consolidations happen and expect them and you cannot expect or predict with a reasonable degree of accuracy if you don’t know what causes market consolidations
  • these four techniques I’ve shown you can not help you predict market consolidations but can stop your from loosing money during those times when the forex market consolidations because you won’t be trading then!

Don’t forget to share, tweet, link or even mention this post in other trading forums and website for your fans and friends to come over here and read as well.

Trading High Probability Consolidations

Chart = Consolidation In A Triangle

Generally when traders refer to consolidation trading , they only think of the horizontal channel consolidation . However, there are various types of consolidations . Really, one can quickly improve the consolidation trading as soon as one begins to make use of various types of consolidation patterns .

Types Of Consolidation Trading

1/ Consolidation During A Rising Channel
That occurs when a financial instrument is oscillating around a bullish dynamic trend line as it is rising without deviating too far away from it. The median in this case is called dynamic trend line.

2/ Consolidation During A Declining Channel
That occurs when a financial instrument is oscillating around a bearish dynamic trend line as it is declining without deviating too far away from it.

3/ Consolidation During A Triangle Chart Pattern
A triangle is a type of consolidation . It does not matter whether it is one of the following:
a/ ascending triangle,
b/ descending triangle,
c/ symmetrical triangle,
d/ expanding triangle
e/ ABCDE Elliott wave triangle
f/ Or any other types of triangles.

4/ The horizontal Channel Consolidation

The most popular consolidation is the horizontal channel.
This time, the price is consolidating around two horizontal key levels. A resistance that is above the price’s range and a support at the other end. Generally, at the sound of the word consolidation, many technical traders only think of the horizontal consolidation . Note that the horizontal consolidation is also called a balanced market pattern when one is talking about market profile .

During a trending phase, there are pauses in the form of various types of consolidation . However, the horizontal consolidation often precedes trending phases in the financial markets. Traders refer to a consolidation phase before a bullish trend as an accumulation, but the consolidation that precedes a bearish trend is called distribution.

Usually, the volatility is low during the consolidation , but there are times when one may come across high volatility consolidations .

5/ Combination Of Different Types Of Consolidations

For example, one may recognize a triangle within a normal consolidation or a smaller triangle in a wider triangle or another consolidation that is inside a dynamic consolidation .
Truly, as one begins to gain more experience as a technical trader, one will be able to pinpoint a wide varieties of consolidation market patterns .
One can just start highlighting the consolidations one by one.
Taking each pattern apart before looking for the next one until one could not isolate any more consolidations .

6/ Fractal Consolidations Trading

Fractal consolidations are those that duplicate their structures on various times frame. They are predictive consolidation patterns that can help advanced technical traders to forecast the next price-action.
Those consolidations may also copy and paste (duplicate) their structures
at different stages on the same time frame or from one financial instrument to another (financial instruments that belong to the same sector or index).

Understanding Consolidation Price Structures

Financial instruments consolidate around influential key levels.
When one identifies a consolidation , one must highlight the median line.
Moreover, one can highlight those median lines like the market profile traders, and
select the best trading set-ups around them.

Many times, a financial instrument will rise from one median line to the next and vice versa.
In fact, those median lines become more influential if the price did not revisit them since they are in place. Market profile traders wait for high probability trading set-ups near those virgin median lines.
A consolidation is also called balanced market because in theory there is an equal influence between the bullish and bearish traders. That equal influence or force causes the price to oscillate around a median price level. Truly, the bulls cause the price to rise up to a distance, but the bears quickly sell it, and it goes back to the initial point. One can say that the price is not going anywhere as long as there is a balanced market (or consolidation ).

A technical traders must learn how to recognise and trade the different types of consolidations in any financial markets. One will also begin to improve technical trading as one aligns the appropriate trading strategy with each
consolidation pattern . As I always say to traders, the market pattern will determine the appropriate trading strategy one will be deploying. Use the various consolidations to positively impact your technical day and swing trading today.

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