When there’s a good price movement
(up or down) and suddenly prices stop moving, a consolidation area
has been formed. Consolidation areas are composed by two
lines that can be parallel or not. Prices oscillate between
these lines, and can’t break these lines one way or another
which reflects indecision.
For applying this strategy, we will use
the Awesomeindicator or the MACD-Histogram so that we can confirmthe
price behaviour. Both indicators work on this strategyand obey the
same rules. I prefer to use the Awesome indicator because I find it
more reliable on my favourite timeframes. If you trade on larger
timeframes, you can also apply this strategy successfully with the
MACD Histogram.To exit the position, we will use the same indicator
again.
The Rules:
Buy a consolidation failure
confirmed by the Awesome indicator or MACD-Histogram. Set your stop
loss below therecent low. Exit the trade when your stop loss is
reached or when the Awesome indicator gives you a sell signal above
its centerline (0).
Short sell a consolidation
failure confirmed by the Awesomeindicator or MACD-Histogram. Set your
stop loss above the recent high. Exit the trade when your stop loss
is reached or when the Awesome indicator gives you a buy signal below
its centerline (0).
Check some examples so that you can
fully understand this strategy.
Entry: Buy GBP/USD at 1.7636
Stop Loss: Below the recent low
Exit: 1.7676
Profit: 40 pips
In this GBP/USD 15 minutes chart, you
can see a consolidation area. This consolidation area appeared after
a 120 pips drop.
In this example, we will use the
Awesome indicator to confirm the trade. As you can see in the chart,
you should place a buy order at 1.7636, when the price breaks above
the consolidation
area and the Awesome indicator also
confirms the trade. You should also place a stop loss order below the
recent low.
After entering the trade, you should
monitor the Awesome indicator until it gives us an exit signal. This
happened at 1.7676 when the indicator turned red. It is now time to
exit the trade with 40 pips profit.
Entry: Buy GBP/USD at 1.7346
Stop Loss: Below the recent low
Exit: 1.7417
Profit: 71 pips
In this example you can see another
great opportunity to make a good profit.
The two horizontal and parallel
lines define the consolidation area. Prices are moving between the
two lines but don’t have the strength to cross neither one nor the
other. We continue to use the Awesome indicator, although you can use
the MACD-Histogram as well.
You should place a buy order at 1.7346
when prices break above the consolidation area, and the movement is
confirmed by the Awesome indicator. As you can see, the indicator is
rising and, in this particular case, it is also below its centerline
(0), which is a great confirmation. You should place a stop loss
order just below the recent low. After entering the trade, you should
see how the Awesome indicator behaves because that’s what will tell
you when to exit the trade. At 1.7417, the Awesome indicator is above
its centerline and just gave a sell signal. This means that it is
time to exit this trade with 71 pips profit. This means $710 profit
for each currency pair you’re holding. It’s a great profit for an
intraday trade.
Entry: Buy GBP/USD at 1.7285
Stop Loss: Below the recent low
Exit: 1.7388
Profit: 103 pips
As you can see in the chart above, you
are going to enter a buy order just 1 pip above the higher horizontal
line of the consolidation area, if the Awesome indicator confirms the
trade. Following this strategy means that both factors –
consolidation area breakout and trend confirmation on the Awesome indicator – have to be
accomplished. If you don’t have them both pointing in the same
direction, there is a chance that the breakout might be false. We had a buy signal at 1.7285. We now
have to look at the Awesome indicator to see when it gives us a sell
signal. This happens, as you can observe, at 1.7388 where the Awesome
indicator turns red, above the centerline line. We closed this trade
with 103 pips profit, $1030 in just a single currency pair. An
intraday trade can’t get much better than this.
Entry: Short GBP/USD at 1.7384
Stop Loss: Above the recent high
Exit: 1.7353
Profit: 31 pips
We are now looking at a different
consolidation failure pattern. As you already know, the lines which
form the consolidation area do not have to be parallel. As you can
see in this chart, the two lines are converging, forming a triangle.
You should draw the lines yourself, so that you can have a better idea of the price at
which you will place your short sell order, if the Awesome indicator
confirms the trade.
In this case, your short sell order
should be filled at 1.7384 and you should put your stop loss just
above the recent high. If you check the chart, you can easily see
that your entry was when the price crossed below the consolidation
area, and the Awesome indicator was confirming the trade. Now, by looking at the Awesome
indicator, we are going to track a good point to exit the position.
This happens when the Awesome indicator, which is below the
centerline, turns green. You should exit this position at 1.7353,
with 31 pips profit.
Entry: Short GBP/USD at 1.8887
Stop Loss: Above the recent high
Exit: 1.8712
Profit: 175 pips
In this GBP/USD 1 hour chart, there is
a clear consolidation area. This consolidation area represents
indecision. As we don’t know for sure where prices will flow, we
look at the Awesome indicator. As you can observe, in this case, you
will enter a short sell order at 1.8887. This price reflects the
breakdown of the consolidation confirmed by the Awesome indicator.
You should place your stop loss order just above the recent high.
After entering the trade, you should wait for a sell signal on the Awesome indicator. As you can see,
when prices hit 1.8712, the indicator turns green, and is below its
centerline. It is time to book your profits and look for another
opportunity. This was a great trade.
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