Forex Consolidation Patterns
Combining indicators with patterns is one of the more popular approaches for those who trade forex. Among the various price formations discussed in books and others texts, consolidation patterns are important because of their role in establishing entry or exit points for a trade, and also for providing clarity to the scenario being examined. If the price action were to consist merely of up and down zigzags with no intervening periods of consolidation it would be difficult to make decisions or just to gather our wits in order to open a position. As such, these formations allow us the periods of respite where we can rest, study the charts and decide our future course.
Among consolidation patterns, most traders attach the greatest significance to triangles. Triangles are somewhat rarer than flags or pennants, but they are still common enough to generate false signals when used on an absolute basis. On the whole there are three kinds of triangles including the ascending, descending, and symmetrical ones. Of these the symmetrical triangle is the most ambiguous, while the descending and ascending triangles are thought to represent bearish or bullish market conditions, respectively.
The truth is that all three of these price formations can signal continuation or reversal with equal frequency. Nonetheless, they can be used as entry or exit areas by identifying trends on a larger time frame. For example, if we note that a strong daily uptrend exists on charts, we can take advantage of a developing symmetrical triangle on a 4-hour chart of the same pair as an entry zone for joining the uptrend. But it is in general not a great idea to use the same triangle as a signal about a formation on the 4-hour chart discussed.
Flags are parallelogram-shaped price formations. They develop frequently during trends of any time-frame, and in most cases, they indicate continuation. Although some flags may develop into a pattern that eventually negates a trend, a trader making use of them for joining a trend will in most cases be profitable. Identifying flag patterns is also easy, and as such, they are one of the best tradeable consolidation/continuation formations.
The last consolidation pattern that we will discuss in this text is the pennant. A pennant is similar to a triangle, it has an apex, two sides, and develops in a way that resembles a triangle. Its difference is that it only exists during periods when the price action possesses great momentum, and is of extremely short duration. It will very quickly break down to create the next leg of an existing trend, and as such, it is difficult to catch it before it disintegrates. Still, it is almost always a sign of continuation, and can be traded with confidence where it occurs.
Of course, the subject of consolidation and continuation patterns is requires a much deeper treatment than what it is accorded in this brief text. For a thorough forex education, you need to acquire some books, and spend some time absorbing the information on online and offline sources, as well as trading yourself in order to gain more experience and capability. Still, every great journey requires a first step, and we hope to have to given you some guidance on your great forex journey with this brief study.
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