What is a Consolidation?

Trades in consolidation patterns can yield substantial profits, but it is important to have a thorough understanding of the concept in order to trade successfully.

A market trend that is constantly moving downward or upward makes it more vulnerable to a reversal. Consolidation or a temporary halt in the current trend is confirmation that the trend is continuing in the same direction. Consolidation gives traders the opportunity to add or take over an existing position.

When the market is going sideways, consolidation occurs. We now need to understand consolidation in order to create a solid trading strategy. Based on the location of consolidation candlestick patterns in the price charts, they can indicate trend continuation (or reversal) depending on their position.

Let's first understand what consolidation means in market parlance before we get into the different patterns of consolidation candlesticks.

What is a Consolidation?

Consolidation is a moment of uncertainty in the market, before it resolves itself.

One way to predict market trends is by looking out for consolidation patterns. If you are looking for consolidation candlesticks to help you form strong trading strategies, traders will do so to either enter a new market position or strengthen an existing one.

Markets tend to move sideways most of the time. Consolidation Candlestick Patterns occur during this phase. Consolidation patterns can indicate either a continuation of a trend or the beginning of a new one.

Any consolidation is a temporary pause between the next price movement and when traders adjust their expectations.

Let's look at the consolidation patterns. There are many of them. We will briefly discuss each one before we talk about how to trade around them.

Consolidation Candlestick Formations

We will be looking at triangular patterns, sideways patterns, and upward and downward slopes. Let's look at different patterns.

Ranges

The price usually moves within a market range, with occasional breakouts. A range is a group of price candlesticks which oscillate around a common price. This is when the stock market agrees on the stock price.

There are two possible ways a range could form: when the market moves sideways or in an upward trend. False breakouts can also occur at the top and bottom. Waiting for confirmation is the best way to trade within a range.

Range formation provides useful information for planning an entry into a market.

Symmetric Triangle

The symmetric triangle pattern is a popular formation that has a slightly sloped upper boundary (resistance) and a moving support line. The range is wide at the opening, but it contracts at the ends to look like a triangle. A breakout occurs usually before the resistance or support lines converge. A trader estimates a profit target by analyzing the differences between the first relative hi and the first relative low. Then, they add it to the breakout point when there is an upward trend. They also subtract the difference from the breakout when market trends are downward to calculate a profit target.

An Ascending Triangle

The price bounces between the horizontal resistance and an upwardly sloping support lines in the ascending triangle formation. This reveals a growing impatience of traders to break the resistance line. This happens when there is strong demand for an underlier.

Stocks that are trending in an uptrend will be more likely to see the converging trianglepattern.

Descending Triangle

The ascending triangle pattern opposes the ascending one and is found in the downtrend. When a horizontal support line forms the base of the price triangle, a declining resistance line is the upper limit. This occurs when traders are strongly bearish about the underlying.

A descending triangle that appears within an existing downtrend is usually more reliable. Usually, the stock price reaches a new low (breakout), before the lines merge. After subtracting the difference between relative high and lowest from the lower boundary, traders set a profit goal.

Flag or Rectangle Pattern

Rectangles are another consolidation pattern that uses resistance and support lines as upper and lower boundaries. Flag is the name given to it because it appears following a long candle, or pole. The price bounces between the lines for a while, before breaking free to resume the previous trend.

Flags are often high-risk situations that can be very rewarding. The flag is usually associated with a strong trend, a sharp advance or decline, and strong volume movement.

Consolidation Trading Strategy

Consolidating trades can yield big rewards. These are a brief pause in market trends before they explode. When trading in consolidation, traders usually consider the following three factors.

Volume The volume movement can give subtle clues as to the strength of consolidation. Volume usually remains flat or low during consolidation and increases right before potential breakouts.

Size of consolidation: This indicates that there is pressure building up for a breakout. Strong breakouts are usually characterized by a longer time period and tighter boundaries. It is important to remember that traders have a greater chance of a false breakout. It is important to wait for a breakout after long consolidation periods.

Confirmation: After a breakout, an underneathr may return to the consolidation phase in a period that is reaffirmation. This is common in forex trading, but it can also happen for any kind of underlier.

Conclusion

Consolidation starts with uncertainty about the price of an underlier, but ends in market consensus. Technical analysts use candlestick patterns to study consolidation and predict the market's next move. Trader who spots a consolidation pattern first is more likely to make a profit. However, he also runs the risk of losing his capital. Consolidation candlestick patterns can be used to identify the right moment to buy and give traders an advantage in spotting trading opportunities.