Forex Price Action Basics - Lesson 9: Consolidation Patterns
Previous lesson, Forex Reversal Patterns...
This lesson will cover consolidation patterns. Many Forex traders that use price action analysis aim to identify specific patterns created by price. Usually these patterns signal a price reversal (trend reversal) or predict when markets are going to rally. In this lesson, we will teach about consolidation patterns. Reversal patterns usually signal a price reversal within the Forex markets, consolidation patterns usually signal a price rally within the Forex markets.
Forex Consolidation Patterns
Consolidation patterns usually form when price is quiet. They usually appear just before large price movements. Those that trade Forex consolidation patterns, usually 'trade the calm, in anticipation of the storm'. Most consolidation patterns are triangular - showing a price "squeeze" before the potential price "pop".
As the name suggests, symmetrical triangles are when price forms a symmetrical triangle within the Forex market. As with most consolidation patterns, the area of price movement becomes tighter and tighter. Eventually price will break the pattern formation and can move strongly in the direction of the break. Below are some screenshots of real price charts that demostrate this...
Do you notice how price is moving between 2 diagonal support and resistance levels that are "squeezing" price? When price eventually comes out of the triangular consolidation, price moves strongly in that direction.
Below is another example...
Below is an example of a symmetrical triangle with an upside (bullish) break...
There are other triangular Forex price patterns too. The symmetrical triangle pattern is very much a sideways consolidation pattern, there are upwards (bullish) and downwards (bearish) triangle price patterns too. These are referred to as ascending and descending triangles (some of these formations are also referred to a wedges). The trading principle is the same; price is consolidating, when price closes out of the pattern (breaks-out), price could move strongly in that direction.
Below are some price chart screen shots of Forex descending and ascending triangle price patterns...
Ranging markets are also consolidation patterns - price is moving between 2 areas of support and resistance. When price breaks-out, the consolidation can be over and price can move strongly in the direction of the break-out. To learn about Forex ranging markets, please visit our Forex ranging markets page.