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:
- all trend trading strategies and systems will give you many false signals.
- 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:
- that you find in monthly, weekly and daily timeframes
- price can at least once or one 2 occasion have tested these levels previously
- 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.
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.
#4: Trending Market Structure Breaks
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.
- 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!
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