Forex market consolidation may be a new term to many of you. However, this isn’t something that should remain unknown to the investors playing in the Forex market. You can use this to identify when the market is at its strongest for an investor to trade-in. There may be times when investors have a hard time identifying the best entry-level to hold onto a trading position.
What is price consolidation?
This is the time after a price breakout where the market tends to remain stable and have a sideways movement. In a sentence you can say, it is the safest period when an investor doesn’t need to worry about any possible breakout. Since the trend is still in the process of being built, it makes this level the strongest point prevailing in the market. Therefore, investors can easily take part in making deals without having to worry about losing.
However, most investors don’t like the term consolidation and many even think of it as a nightmare. Why? It is because the market doesn’t move much here so it is very unlikely that you make a profit on a larger scale. Investors need a volatile market to make some money from it in their pocket and consolidation is a barrier to that. The biggest disadvantages that consolidation creates are-
- It can often lead to false signals about the price movement. Since trading strategies cannot work well in a sideways trend, they often send false signals to users.
- When the consolidation continues, there is rarely any chance of predicting what is going to happen next. This makes investors suffer from a huge dilemma when executing their trades.
Then why is it important to identify a consolidation? First of all, it is impossible to identify a consolidation because you never know what is going to happen in the Forex trading industry. The trend that took place just hours ago can break and form a new trend without any warning. Now, if an investor ever knew when a consolidation would take place, then they would not have to worry about making money or losing trades.
Most of the time, consolidation is only identified after it takes place. The best you can do is to predict these consolidations based on market movement. So, here are some ways you can do this.
Observing the major price levels
When we talk about the major price levels, we are indicating the support and resistance lines. These support and resistance lines function in showing the highest and lowest levels in price within a specific time. Well, we guess you won’t need to know about the kindergarten level stuff. When the difference between the support and resistance remains marginal, you can assume that consolidation is happening. You can expect a consolidation by looking at the major support and resistance lines. Make sure you look the major ones as the usual support and resistance zones are not much help here.
If major economic events take place very often, then it is possible to predict a consolidation from that. While investors are waiting for such events to occur, market consolidation can take place in silence. So, anticipating market events beforehand is a way to assume any market consolidation. This consolidation may take place just before or after the occurrence of a major economic event.
It is not hard to assume that when the number of participants is less, the amount of market volatility decreases. This mainly happens when investors are on vacation. Vacation means people are not working. No work means no volatility. So, the market tends to move at a much slower pace. Therefore, keeping an eye on the market during the holiday season can help you to understand the consolidation much better.
Market consolidation is more prevalent in smaller time frames and thus using a larger time frame will be a helpful method to use to avoid price consolidation.