2021-09-18 18:53:06
#Make a difference
Consolidation or Range Trading
A period of consolidation occurs when demand meets supply. It is also called sideways or ranging.
ADVANTAGES:
It is said that the market stays in consolidation periods 70% of the time.
Stop orders are placed close to the entry price
DISADVANTAGES
Extreme volatility may occur during these periods
Sometimes the high and low of the range are not clearly defined
COMMON STRATEGIES
Indicator overbought/oversold condition: Stochastics are the most effective indicator to track overbought/oversold conditions.
Buy at the bottom of the range/sell at the top of the range: When applied in combination with price behavior, this technique usually has a high accuracy.
If you are going to trade different market conditions then it is important that you use different strategies, most trend-following strategies will fail under consolidation periods and most consolidation periods strategies will fail when a trend is in place.
Take for instance: You have decided to use a MA to determine the trend of the market. Therefore, when the market is trending (price above/below the MA) you use a trend-following strategy. In addition, when the market is not trending (the MA line is flat or close to flat) then you use a consolidation strategy.
Also, when you use a counter-trend strategy, for instance a chart reversal pattern, if it was a valid pattern and the trend reverses, then you can use an exit strategy based on a trend-following system so you are able to catch most of the trend.
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