How to Recognize Medium Consolidated Market Conditions
Consolidation is a term used in technical analysis, both forex and stocks, to describe a flat period. When consolidating, price movements don’t seem to change much. You could say, the market breaks first before continuing the trend.
What is the impact if it’s too late to bring up market consolidation? Look, here, an example of a chart of price movements when consolidating after a downtrend:
Traders feel reluctant to trade when the market consolidating
The above example has been explained that when the market is consolidating, traders will usually take advantage of this moment for evaluation and adjust the strategy again. Especially for trend-loving traders, no one wants to trade when consolidating like this.
Why? Because prices are really being stagnant or not volatile. We will find it difficult to profit at this rate. Price movement or good price movement is having enough volatility. Remember, volatility is enough because excessive price volatility is also horrific, you know.
In essence, these are the two common difficulties when we trade when the market consolidates:
1. So if the market is consolidating, the system will often provide false signals.
2. If consolidation continues and we don’t realize what’s going on, we might lose a large number of funds in our trading account. Why? Because it is difficult to get profit, we will be more “slack” to open positions here and there, even though the results will not be much. It’s different if we realize that the market is consolidating, we can just step aside and set the next strategy.
There are 4 ways to recognize the market conditions that are being consolidated
1. Identification of Major Price Levels Like With Support and Resistant Levels
You probably already know how to determine support and resistance levels?
Keep in mind, the support and resistance levels are not the usual ones, you know, but the MAIN SUPPORT AND RESISTANCE levels. When the price points towards the major resistance or support level, install an estimate of the possibility of market consolidation. So, don’t forget to anticipate.
Then, what are the major support and resistance levels? the following is the explanation:
1. Usually, we can find it at monthly, weekly and daily time frames
2. Prices are at least one or two times formed after being tested at the previous support and resistance levels
3. We will see that this price has moved at a significant distance after touching the usual support and resistance levels. It can be around 500 or 1000 pips the difference.
2. Important News or Political-Economic Events
Consolidation usually occurs in connection with major economic or political events. Generally, it occurs ahead of the big fundamental release. Why? Because usually, the market prefers to step aside before the announcement.
For example, just before the US Non-Farm Payroll announcement. Often, the candles on the chart show minimal movement ahead of the US employment report. In order to update about these big events, we must be diligent in monitoring the forex calendar.
3. When the Holiday Market
Well, this is the most frequent. Volatility will usually be very low when the market will be a big holiday like Christmas. However, when the Eid holiday is usually not very influential because the world’s largest financial markets are in Europe and the US which is more generally celebrating Christmas.
4. Observe Break In Trending
The fourth way to identify whether the price is consolidating or not is to monitor the break in the swing high/low pattern in the trend. Price trending characteristics usually have a structure like this:
*In an uptrend market, prices will make higher highs and higher lows too
*In a downtrend, prices will make lower highs and lower lows
A forex trader must understand the structure of a market that is trending. Once we start to see price behaviour that is different from the trend, then we can begin to ask ourselves whether the price will be consolidated or not.
A moving market will create a type of structure with a higher high (swing high) or a lower low (swing low), where the trend will continue to push the market to a new high or low
Effective Ways To Trade During Consolidated Markets
The secret is trading on a larger timeframe. Market consolidation is usually common in smaller timeframes, but if we switch to trading in larger time frames such as daily, then we can avoid price consolidation that usually occurs in a smaller frame-time frame.
In the end, the four methods above cannot accurately predict when the market will consolidate. But at least, we don’t need to lose too much money because once we realize the market is consolidating, we will wisely stop trading.