How to identify whether we are in Trend Consolidation?
How to identify whether we are in Consolidation?
In previous lessons we have seen different types of trends and “How to identify whether we are in an uptrend and downtrend”. Now we are moving to next type of trend, which is consolidation.
CONSOLIDATION
There are 2 types of consolidations — Bullish and bearish consolidation.
· There are times where price is not clearly moving in any particular direction, steam has been lost and price starts bouncing off opposing imbalances like a ball on a tennis court.
· This is where most traders get confused and lose the money they potentially made in trending markets.
· This is the time when the trader asks himself why his mechanical trend following system does not work anymore.
· This is also the time where the trader is at greatest risk to loses confidence in himself and the methodology he is trading
So it is very critical to understand the consolidation phase properly.
In this video, we are going to see the rules to define and identify a bullish consolidation.
Bullish Consolidation
A bullish consolidation happens when price was in an uptrend and after that, either
· An ascending uptrend line is broken by one full candle (the open/high/low/close) and it is fully under the trend line OR
· The valid demand zone — irrespective if it was a CP or Valley — underneath price is broken (Even if it is just by a one tick) OR
· When both these happens
When any of these scenarios happen, you are not allowed to take any longs (buys) in the direction of the previous uptrend line until
· Price makes a high that is higher than the previous high (price resumes uptrend) OR
· Price hits a demand zone of 1 higher time frame below it, also known as realignment (further lesson)
IMPORTANT: Please do not stress out over the last point yet. You will learn this in a later lesson. For now just learn and accept this rules until it becomes second nature to you. The last point is the concept of the realignment and sequence mentioned earlier.
Possibility 1
An ascending uptrend line is broken by one full candle (the open/high/low/close) and it is fully under the trend line
Possibility 2
The valid demand zone — irrespective if it was a CP or Valley — underneath price is broken (Even if it is just by a one tick)
So when this bullish consolidation happens, we should stop taking any trades in the direction of the prior trend and wait for the next signal to be formed.
So to summarize, we can consider that bullish consolidation has officially began, if price was in a prior uptrend and if:
· An ascending uptrend line is broken by one full candle (the open/high/low/close) and it is fully under the trend line OR
· The valid demand zone — irrespective if it was a CP or Valley — underneath price is broken (Even if it is just by a one tick) OR
· When both happens
Hope you are clear on “How to confirm whether we are in bullish consolidation” now. We can see bearish consolidation scenario in the next session.
For more details and examples, checkout the video: