Bilateral/Consolidation Chart Patterns Forex Trading
With bilateral/consolidation chart patterns the market can move in any direction. There are two types of consolidation chart patterns that form on Forex trading charts:
- Symmetric Triangles - Consolidation chart patterns
- Rectangles - Range/ranging market
Symmetrical Triangles - Consolidation Chart Patterns
Symmetrical triangles are chart patterns with converging trend lines that form a consolidation period. The technical buy point from a symmetrical triangle 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.
Forex Trend lines can be drawn connecting the lows and highs of the consolidation phase, the trend lines formed are symmetric and converge to form an apex. A breakout should occur somewhere between 60-80% into the triangle chart pattern. An early or late breakout is more prone to failure, and therefore less reliable. After a price breakout the apex forms 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 direction to take.
These consolidation patterns form when there is a tug of war between the buyers and the sellers and the market cannot decide which way to move.
Consolidation Chart Pattern
However, this pattern cannot go on forever and just like in a tug of war one side eventually wins, looking at the currency chart below see how the consolidation eventually had a breakout and moved in one direction. Now how do we make sure we are on the winning side?
Breakout Downwards Sell Signal after a Consolidation
Breakout Upwards Buy Signal after a Consolidation
Now back to our question, how do we make sure we are on the winning side?
Well we wait until price moves past one of the lines and put buy or sell orders in that direction. After consolidating, If 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, you can use pending orders. If you would like to know more about pending orders go to the topic: Stop Entry Order Types
The two types of stop order types used to trade consolidation chart patterns are:
- Buy Entry Stop
An order to buy at a level above the market price.
- Sell Entry Stop
An order to sell at a level below the market price.
These are orders to buy above the market or to sell below the market.
Rectangle Chart Pattern
A rectangle consolidation 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. This pattern is drawn on a 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 pattern forms over an extended period of time giving the 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 breakout is a buy signal. A downside breakout is a sell signal.
Rectangle Pattern - Consolidation Pattern
Price Breaks the consolidation range after sometime and continues to move upwards after an upwards market breakout.