I’m looking for an objective way to draw consolidation areas and it occurred to me that I may have been drawing them incorrectly. Some have been saying to draw as many bodies of the candles which are in a sideway pattern and I’ve been drawing them from high to low.
I’m guessing the logic to the prior is that the bodies capture most of the volume so that’s more important.
And it doesn’t help when you have oversold and overbought areas spiking outside the consolidation areas to muddy up the information you’re trying to analyze.
If I can ask some of your experts can post your charts and explain your reasoning. Maybe it’ll finally sink in somewhere in my head.
No indicators please. I want to train my eyes a little better.
My advice would be to simply stop caring about consolidation patterns. Consolidation patterns job, is to trap retail traders into doing the wrong thing, time and time again.
The following demonstrates recent price action in the Euro, and what happened to traders who placed their trust in the candle patterns:
And below, the orange box shows the price action where the retail trader with his cheat sheet of chart patterns was getting rinsed time and time again, during the price action that was setting up the next trend following shorting opportunity, for those with both an eye for the key levels, and who had the correct bias.
Ignore patterns. Focus on key levels and momentum. You should be able to see at a glance how this worked out in the EURUSD over the past year, and if you want to go and study and break down the consolidation patterns in between the impulse moves as I have done in my first chart above, you will see trap after trap after trap after trap for anyone naive enough to trade them in the way that things like the Babypips courses and indeed many paid courses suggest that you should.
I also don’t trust consolidation areas. For this reason I never draw horizontal lines. Markets go up or down so although a consolidation may herald a reversal, more often or not it’s just a temporary slowdown before the prive continues in the same direction. For this reason I draw diagonal lines cos they are trend flowing and more likely to indicate a major reversal when this prices breaks through them.
Horizontal levels is where it is at. After all these represents areas where selling pressure or buying pressure was exhausted, it is a question of pinpointing meaningful S&D zones, or at least those that remain meaningful to the framing of your trade idea.
I find that horizontal lines tell u more about the past whereas diagonal lines give you more a glimpse into the future. Horizontal lines ignore trend, so yes - you’ll see activity when the price enters a previous consolidarion zone, but I think the trend is a stronger indicator and diagonals take that into account. However, I admit that the lasttime I used horizontals was years ago when I was trading badly and losing money. Now I’m profitable and wiser I might give them another go and see if I can make them work for me.
If you look at the Daily EURUSD chart I posted above, you will see a great example of a horizontal channel holding for around 1 years worth of bearish trending price action. The one thing that is wrong with it, is that it has held too long and too perfectly. Usually diagonal TLs will be breached, only for the ‘breakout’ to fail, and the trend continue to the downside, with an adjusted bear trendline.
Something else you may notice from that EURUSD chart, is the 5 pivots that form the tangents of the bear channel TL, where also tests of Horizontal Supply & Demand Zones. Levels where price found support, and went shooting back upwards, only for price to consolidate, and ultimately smash through the support level. These were the times when the swing trader should have gotten interested. when a key horizontal level is emphatically breached, especially so leaving big volume gaps in the Volume Profiling, you can bet that there will be big funds who didn’t get the opportunity to lighten their long exposure to the EURUSD that they would have liked, and who will take any revisit of that level as a chance to correct the balance of their positions, thus previous support becomes future resistance, and thus a great trade location…especially so if the revisit of that level coincided with a retest of the horizontal upper channel TL.
Well, I use PSAR balls (0.09 0.50) to link horizontal price movements, and to place my T/P before it reaches this zone. Which is a far better option than waiting for a breakout to occur.
Why? Because a consolidation zone represents an area where losing traders close their trades or get stopped out. While winning traders have the option to follow suit or wait until the price drops and add to their positions. In an upward or downward trend, I would suggest it is more likely to continue.
Because market sentiment is lazy, and unless there is a major economic media report that galvanises traders to make a decision, they will stay put.
I also do not draw consolidation zone boundaries or levels. But I do note that a trend has stalled and price is consolidating, in which case I avoid setting entry orders and consider exiting any with-trend position.
For me a good clue we’re getting into consolidation is on the D1 chart, when daily bars start printing as inside bars with no subsequent closes above or below the inside range. And when we get outside bars printing with likewise no subsequent closes outside the range. When price fails to break out from these clusters of IB’s and OB’s, there is no point me opening my usual trend-following trades, price is currently going nowhere.
