Simple and Practical Trading Methods of Market Consolidation

Consolidation is one of the important reasons for many traders to lose money, during which many foreign exchange indicators and automatic trading tools become useless. But I believe we can definitely reduce transaction losses and avoid periods of inappropriate trading by watching out for consolidation in advance.

So how can we tell the market is about to consolidate?

Although there is nothing 100% for sure in market, there are still some methods to enhance the accuracy of our forecasts. The following methods may be helpful for you.

Trade cautiously at key prices.

One of the most important technical factors in the chart below is the main support level and resistance level, and here I am referring to the horizontal support level and resistance level on the weekly chart. They may block trends and become catalysts for reversal. More importantly, they will absorb capital flows, leading to consolidation.

In the picture above, a wave of bullish trends rush towards key prices.

Switch to the daily chart and you will see the following chart:

The trend slows down and moves into consolidation as it approaching to resistance level, which means lots of traders prefer to sell at key prices.

In the weekly chart above, there is also a false breakout, which is just a classic bullish breakout trap. Some unscrupulous traders buy a breakout, only to provide other short traders a better opportunity to enter the market. There is not enough buying to push the price higher.

There are a lot of stop-profit and stop-loss orders near the main price.

Be very cautious when trading near key prices. If you are not experienced enough, it is better to stay away.

Here is another example of consolidation at key price levels. In the crude oil chart, there is a strong support level, which is affected by a strong drop and seems to break through, but soon the price reverses. It looks like this in the daily chart:

It can be seen that after the bearish near the key support level breaks through trap, the price falls into consolidation.

In short, weekly support and resistance are key prices with a lot of orders here. Once the price reaches the nearby area, a large number of transactions will be triggered easily, and big players are waiting for a potential price reversal. Therefore, consolidation is likely to occur near key weekly prices.

Major central bank events.

Focusing on swing trading, I mainly do chart analysis based on market fundamentals data. However, the fundamental events of some major central banks are still noteworthy.

The central banks of the major powers own huge wealth, the monetary policies of which will cause fluctuations worldwide. Central bank policies may be based on economic stability and the impact they have on the market is slow and long-term, which often lead to changes in major market trends.

The external statements of central banks, however, are usually subtle without promising any inevitable results. Therefore, the statement of important central banks will cause big swings in the market, because different player interprets the results differently.

Above is a daily chart of EUR / USD in 2015. I have marked several key points when FED made speeches on potential rate hikes. The interest rate hike at that time was about to be the first in a decade, which attracted great attention. Therefore, when the central bank claimed that interest rates may rise, the market entered into a consolidation. It is almost impossible for the market to form a trend until the interest rate hike is confirmed.

In short, the fundamental news of the central bank is the focus of many people. If the central banks of major powers hint at potential policy changes, the market is likely to enter consolidation until the final result. As technical analysis traders, we don't have to follow the news. After all, price trend is our guide to trading. Still, it is helpful to know important fundamental information, which can make us more prepared for possible changes in the market.

Market during holidays.

Financial markets are seasonal and there are times when price movements are minimal, especially during the Christmas and New Year holidays. On such festivals, traders are away from the market when reuniting with their relatives and friends.

Generally, the market is more active before Christmas, then enters a period of consolidation, and gradually resumes activity until mid-January.

Another period calls for extra attention is summer, mainly summer in the northern hemisphere, when most financial players are on holiday, making liquidity lower, thus ending up with consolidation.

Anyway, the market is not active enough during important holidays such as Christmas. What’s more, and summer in the northern hemisphere is not suitable for trading due to insufficient liquidity.

Find clues by interpreting the structure of market.

As technical analysis traders, we need to assess the current market situation and predict possible price fluctuations. One of the best methods is to pay attention to the highs and lows of fluctuations made by prices. From the highs and lows we can basically get an idea of the market structure. One way to identify consolidation is to pay attention to the time when the price breaks the trend high / low pattern.

In the chart above, the market is in a trend and is constantly forming higher highs and lows. Suddenly, the price starts to violate such pattern with lower highs. This tells us that the market will enter a consolidation structure when it fell out of the trend.

Here is another example:

Let’s interpret the market based on the distribution of highs and lows. It starts with a sustained downward trend until prices suddenly break this rhythm with highs and lows almost at the same height, which is a textbook-like range market.

In short, technical analysis does not need to be complicated. Traders can make a pretty good market analysis based on the highs and lows of volatility. Identifying the market structure helps you quickly understand whether the market is in a trend or is about to move into consolidation.