Trade consolidation zones

Trade consolidation zones

First things first, in a nutshell a consolidation zone is an area on the chart, usually looking like a rectangle, where the price bounces between 2 price levels. For a clear picture see the picture below:
Trade Consolidation Zones
Consolidation Zones expert advisor for Metatrader
You can see that the price, initially falling, stopped somewhere between 1.313 - the upper level also called Resistance Level, and 1.311 - the lower level, or the Support line, because it kind of holds the whole consolidation zone.

There are 2 types of trading a consolidation zone, and before explaining them it should also be said that that the experienced traders can trade profitably both of these, despite the previous trend. In fact, this style of trading was “invented” just to break away of the “follow the trend” idea and trade without any other interference.
  1. The most used is the breakout, sometimes using an OCO (one cancels other) approach. In this scenario, the trades, as soon as he notices that a consolidation zone is forming, places 2 pending orders: one a little above the higher level (resistance) and one below the support line. From this point it doesn’t matter where the price breaks out of the CZ. Either one way or the other will trigger a trade to open, and hopefully it will continue to move away from the consolidation zone so the trader will also be able to profit from it.
  2. The second method, not so popular, is treading within the CZ levels. This often requires a leap of faith and it assumes that the price will continue to bounce between the 2 price levels. So the trader will place a pending buy somewhere close to the support level, but usually not below it, assuming that the price will fall back to that level then return; vice-versa for sell orders, which are to be placed a little below the resistance level. In this case, a take-profit can be set at the opposite level and a stop-loss right after the closest level. So, if the trader opens a sell close to the support level, the stoploss will often be below the support line, and the takeprofit at the resistance line or close to it.
There isn’t anything else to be said about trading consolidation zones, except try both of the methods until you master them and are able to make profit on demo, only after switch to live trading, where the real money are.
FYI, there is an expert advisor capable of trading both of these methods, that also has lots of useful functions like avoiding the news, trailing the price, even martingale. You can find it and download it for free (works on demo accounts only) from the RobotFX website.
If you have anything else to add about this trading strategy, please feel free to leave a comment.