This is a brief introduction on how to
trade on consolidation patterns.
When a market is
described as “inconsolidation” the opposite characteristics are
in place, relative to trending or breakout
market (where price values are changing morerapidly).Next we will
look at some market formations that show markets are in consolidation
phases and then explain why these situations are best suited for
trades that are within the “double no touch” variety.
Consolidation Patterns
Here, we will look at
three common consolidation chart patterns that can be found when
conducting technical analysis. The ability to identify these
patterns: These patterns include:
Rectangles, Ascending
Triangles and Descending Triangles.
Examples of the
Rectangle Chart Pattern
When prices are caught in
a rectangle, price values are usually seen bouncing between clearly
defined support and resistance levels. Below is an example of this
occurrence, using a 4 hour chart in Oil:
From the chart, you can
see that prices have attempted to overcome support and resistance
levels in multiple occasions. In this case, we expect market
participants to be experiencing indecision and that price values are not
likely to change much in the coming time frames. So, how can this
information be used to place trades?
Consider the following
chart:
Since we expect prices to
be trapped within this range of support and resistance, strike prices
for double no touch options can be place just outside of these
support and resistance levels. In this hypothetical example,
these prices are shown in red, just outside the rectangle patter that
is expected to contain prices going forward. With even the RSI in
this example showing that prices are neither overbought nor oversold,
there is little indication that prices will be able to move out of
the rectangle.
The Ascending Triangle
Pattern
Next,
we look at the Ascending Triangle. This pattern is characterized by
upward sloping trend line on the bottom side along with a flat
resistance line on the top side. A visual example of this can be seen
on the GBP/USD chart below:
Of
course, the ascending triangle is a consolidation pattern, which
means that we are seeing market indecision and we are not expecting
prices to move much from current levels.
Since
we do not expect prices to move much from current levels (given the
consolidation pattern and the neutral RSI reading, we can place our
strike prices just outside of the triangle area. Examples of
potential strike prices can be seen in red for the chart above.
The Descending
Triangle Pattern
Next,
we look at the Descending Triangle. This pattern is characterized by
downward sloping trend line on the top side along with a flat support
line on the downside. A visual example of this can be seen on the Oil
chart below:
The
descending triangle is a consolidation pattern, which means that we
are seeing market indecision and we are not expecting prices to move
much from current levels.
Since
we do not expect prices to move much from current levels (given the
consolidation pattern and the neutral RSI reading, we can
place our strike prices just outside of the triangle area.
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