Bilateral/Consolidation Chart Patterns Forex Trading
With bilateral/consolidation chart patterns the market can move in any direction after these patterns have formed. There are two types of consolidation chart patterns that form on Forex trading charts:
- Symmetric Triangles - Consolidation chart patterns
- Rectangles - Range/ranging market
Symmetrical Triangle Patterns - Consolidation Chart Patterns
Symmetrical triangles patterns are chart patterns with converging trend lines that form a consolidation period in the forex price movement. The technical buy point from a symmetrical triangle chart pattern is the upside break, while a downside break is a technical sell signal. Ideally, a market breaks out from a symmetrical triangle prior to reaching the apex of the triangle chart pattern and the price breakout can either move upwards or downwards.
Forex Trend lines can be drawn connecting the lows and highs of the consolidation phase of these symmetrical triangle consolidation patterns, the trend lines formed are symmetric and converge to form an apex. A forex price breakout should occur somewhere between 60-80% into the triangle chart pattern. An early or late breakout is more prone to failure or whipsaws, and therefore less reliable. After a price breakout the apex forms the support and resistance levels for the price. Price that has broken out of the apex should not retrace past the apex. The apex is used as a stop loss setting area for the open Forex trades.
When these consolidation patterns form we say that the forex market is taking a break before deciding the next price direction to take.
These forex consolidation patterns form when there is a tug of war between the buyers and the sellers and the forex market cannot decide which way to move.
Forex Consolidation Chart Pattern - Symmetrical Triangle Consolidation Forex Chart Pattern
However, this consolidation chart pattern cannot go on forever and just like in a tug of war one side eventually wins, looking at the forex chart below see how the consolidation pattern eventually had a price breakout and moved in one direction. Now, how do we make sure we are on the winning side of the trade?
Forex Price Breakout Downwards Sell Signal after a Consolidation Symmetric Triangle Chart Pattern
Breakout Upwards Buy Signal after Forex Consolidation Chart Pattern
Now back to our question, how do we make sure we are on the winning side of the forex trade breakout?
Well we wait until the forex price moves past one of the consolidation lines and put buy or sell orders in that direction. After consolidating, If forex price breaks the upper line we buy, if it breaks the lower line we sell.
Alternatively, if you do not want to wait out the consolidation chart pattern to play out, you can use forex pending orders. If you would like to know more about forex pending orders go to the topic: Stop Entry Order Types
The two types of pending stop order types used to trade consolidation chart patterns are:
- Buy Stop Order A pending order to buy at a level above the market price.
- Sell Stop Order A pending order to sell at a level below the market price.
These are pending orders set to buy above the market price or to sell below the market price.
Rectangle Chart Pattern
A rectangle consolidation chart pattern is a trading range with narrow price action that forms a consolidation phase in forex market. The trading range is defined by two parallel trend lines which are horizontal and indicate the presence of support and resistance levels. This rectangle chart pattern is drawn on a forex chart using a rectangle, therefore its name rectangle chart pattern.
For this consolidation chart pattern, price forms multiple highs and lows that can be connected with horizontal trend lines that are parallel to each other. This rectangle pattern forms over an extended period of time giving this consolidation chart pattern its rectangle shape.
A breakout of price action from this consolidation pattern occurs when either of the horizontal line is penetrated and the trading range of this rectangle is broken. An upside price breakout is a forex buy signal. A downside price breakout is a forex sell signal.
Rectangle Pattern Forex Consolidation Pattern
Forex price breaks the consolidation range after sometime and continues to move upwards after an upwards forex market price breakout.