Identify Price Consolidation Patterns for Momentum and Directional Trading

Consolidation Patterns are technical analysis chart patterns that occur frequently. They represent price areas where energy and momentum tends to accumulate. They form over multiple time periods providing the time to recognize the trading pattern price formation, perform technical analysis and then take action.

While chart patterns form they attract more and more attention by those awaiting the expected energy release and its resulting price movement. They reflect a trading psychology and they also cause trading psychology to occur.

Price patterns are useful to identify possible reversals at price tops and bottoms, however these trading patterns are very useful within an existing trend to quickly identify an area of a price chart for further analysis. Within this context they are a confirmation for entry into a trade or the continuation of price movement for an on-going trade.

Many traders, after recognizing a trading pattern, draw a square or rectangular box around the area of consolidation similar to a Darvis Box. Thus, the perfect or imperfect price pattern is isolated, analyzed as to its potential and acted upon when price moves from that area.

Many traders after recognizing a price consolidation forming identify whether sufficient price momentum exists and the expected price direction from the consolidation. Then they establish queued trade order entry set-up(s) that open their trade(s) when price moves in that expected direction. For example, a buy or sell stop-limit order might be established by the trader.

When there is substantial momentum price can quickly move from a price consolidation area, especially if trading in shorter price chart time frames. Their trade set-up is already prepared to capitalize that price movement.

Price Consolidation Patterns are rarely utilized by them self to make a trade entry or exit decision. They are one of the technical analysis criteria of the trader upon which to base trading decisions. When they form in the higher time frame and are combined with other technical confirmations for trade entry in the time frame being traded they provide a higher probability of trade success.

5_Forex_Trading_BuzzIt is a constant dismay when reading that certain Consolidation Patterns are bullish or bearish depending upon whether the pattern forms as rising, falling, etc. and examples many provide to substantiate the fallacy. This is especially true when considering flag, wedge, rectangle and broadening formations. All patterns should be considered within the context of price and momentum. That is, whether price and momentum is to continue or reverse. Thus, the formation of a pattern should not be an acceptable singular principal element upon which trade decisions rest.

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