Consolidation in Forex Charts

It's important to notice when prices are moving sideways in forex price charts. When this happens, you'll want to use different rules for trading forex.

The market is always moving relative to time on forex charts.

It can move in three directions: upward, downward, and sideways.  If the market is moving upward or downward it is trending and if it is moving sideways it may be in consolidation.

Consolidation (also referred to as accumulation, bracketing, or sideways movement) occurs when prices establish a tight trading range create somewhat equal levels of support and resistance (that is, the support and resistance lines are roughly flat and parallel to each other).

To qualify as consolidation prices must be moving horizontally in a tight trading range (20-60 pips between the high and the low of the given trading period) for 6 hours or more.  Each forex chart has its own overall trading range, while consolidation ranges can exist within that forex chart.

Notice how prices consolidate on this forex chart before breaking out to a signifcant downtrend

Forex Price Consolidation

Consolidation usually (but not always) occurs right before a major breakout.  There are two key reasons why the market would be in consolidation: first, forex prices on the charts have reached the value that traders are willing to pay (not more, not less).

In this case the game between the bulls and the bears is tied up.  As in any game, however, one team will pull out ahead again eventually.  The second reason why the market would be in consolidation is that traders are not trading, because they're waiting for a fundamental announcement.

In my next blog post, I'll describe the basics of forex fundamental announcements. Understanding what to look for and what to avoid in forex fundamental announcements is a valuable skill to have when looking at forex charts and trading the forex market online!

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