Forex Consolidation

Forex Consolidation

Forex Consolidation

Successful Forex trading requires knowledge of the main trends of price movement in any phase of the market. Forex consolidation is very common in the practice of every trader. It is important to see it in time to know what steps to take next. After all, the correct decision depends on the size of the trader's profit.
What is a Forex consolidation zone?

Consolidation is called price movement on the chart in a narrow range. This movement is often referred to as a sideways trend.

Often, the Forex consolidation zone, or abbreviated WK, appears after the sharp jumps in the exchange rate that were previously caused by any news events have faded. ZK can be called a kind of price stabilization after a long or sharp movement.

Forex consolidation occurs mainly because the level of demand is equal to the supply of a particular currency. In other words, the volume of purchases and sales is almost equal. Often, at this time, most experienced Forex traders take a wait-and-see position.

But the market can remain in this state for quite a long period of time. In this case, the market situation is called flat. In other words, the price moves in a very narrow channel, which usually does not exceed 20-30 points. Opening trades at this time does not make much sense, since the spread will not allow you to earn money. Visually on the chart, Forex consolidation looks like this:

Forex consolidation

Figure 1. Example of a consolidation zone.

As soon as the limits of the consolidation zone are broken by the price in any direction, then we can assume that this figure is broken. This usually happens after the release of some news. However, the flat state in the market can be disrupted by a sharp change in the supply or demand of a particular currency.

Most traders consider the price exit from the consolidation zone on Forex as a signal to enter the market.

Important: in which direction the price will break through the narrow box of the PO, the price will usually move in that direction. But it should be taken into account that sometimes the price breaks through both sides of the consolidation box in trading to collect stops. Therefore, you need to be careful in this regard and follow the rules of money management.

In order not to wait for the Forex consolidation zone to be broken, many traders use pending orders. When the price touches the delay and continues moving in the same direction, you can delete the failed order.

Moreover, consolidation can occur not only on currency pairs. This phenomenon also occurs when trading stocks and metals.
Types of Forex consolidation

There are three types of consolidation: downward, upward, and sideways.

Now let's look at each type of consolidation on Forex in more detail.
The downward consolidation Forex

This type of market consolidation occurs during a downtrend. At this time, market participants try to fix profits in order to reduce their risks. On the Forex chart, the downward consolidation looks like this:

consolidation in trading

Figure 2. Example of downward Forex consolidation.
Upward Forex consolidation

This type of consolidation occurs when most market participants decide that the price is very low. This encourages them to close their positions, fixing their existing profits. An example of upward consolidation can be seen in the figure below:

Forex consolidation zone

Figure 3. An example of a rising consolidation Forex.
Sideways Forex consolidation

Sideways consolidation occurs in the market at a time when the supply and demand values for a financial instrument are approximately equal to each other.

To increase the profitability of any Forex trading strategy, consolidation in trading should be recognized by the trader once or twice.

Important: the area of consolidation good for practicing Forex trading on a higher time frames, starting with H1.

So, we learned what Forex consolidation is, considered its types and examples on the charts. But the main question remains open: how to make money in the consolidation zone?
Forex consolidation zone indicator

To avoid wasting time on detecting and drawing channels on the chart, there is a good indicator of consolidation zones. Its name is Consolidation Breakout.

The Forex indicator that draws consolidation in trading will show the direction of the price movement breakout, as well as where to place Stop Loss orders in order to limit possible losses in time.

On the chart it looks like this:

consolidation breakout

Figure 4. The Consolidation Breakout Indicator.
Forex strategy based on consolidation zones

As soon as the Consolidation Breakout indicator displays the WK on the chart, we need to wait for the corresponding signal about the breakout of one of the Forex channels. This signal will be displayed as arrows (up or down).

Then you need to wait for the Japanese candle to close outside the consolidation zone. After this close, we place a buy or sell order, depending on which arrow appears on the chart. The Stop Loss order must be placed in place of the red cross. It appears immediately after one of the lines is broken.

The Consolidation Breakout indicator, which shows consolidation in trading, can be used on any currency pairs. However, it is better to use currency pairs from the major series, without running into the exotic. Applies to all time periods. However, it shows itself best on the H1 and H4 timeframes.

Important: it is best to filter market entries after the signal of the Consolidation Breakout indicator in the direction of the global trend. For example, if the working timeframe is H1, then you need to take into account the trend on H4 and D1.

Conclusion

In this article, we have considered what Forex consolidation is. We also learned that there is a downward, upward, and sideways consolidation. We saw how they look on the charts. In addition, they told about the indicator that draws the WK, as well as a trading strategy based on it.

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