Every consolidation in Forex charts will eventually end in a breakout in Forex trading (usually wild and fun!).
When Forex traders identify a price consolidation, they usually anticipate a breakout to follow. A breakout occurs when prices break out of consolidation, penetrating the support (downward breakout) or resistance (upward breakout) lines.
How to Trade Price Consolidation Breakouts in Forex Market?
To profit from a consolidation and breakout, you will need to make a straddle trade. Because you cannot know when currency trading whether the market will break out of consolidation downward or break out upward, you need to prepare for either (thus you are straddling the consolidation).
Place one order to buy 25+ pips above the level of resistance and another order to sell 20 pips below the level of support.
Why place your buy and sell orders beyond the levels of resistance and support in the Forex? – Otherwise, you could be entered into the market when it is still in consolidation, by a relatively minor 5 or 10 pip spike within the consolidation. You don’t want to enter until just before the fundamental announcement (the anticipated breakout point).
Why place your buy order 25+ pips above the level of resistance and your sell order only 20 pips below support? – Remember that the chart you look at is a bid chart, but the price you buy at is the ask (which, remember, is about 5 pips above the bid price).
How to Trade Inside The Price Consolidation Zone?
While currency trading breakouts from consolidation can lead to solid profits, if the consolidation range is large enough, it is also possible to profit from trading inside the consolidation.
This would be a consolidation you would not want to place a straddle on, however (if the trading range is wide enough to profit from trading the consolidation it would be too risky to straddle).
In this case you would sell at the resistance level with a profit limit at the level of support and a stop loss at the last level of resistance. You would also want to buy at the support level with a profit limit at the level of resistance and a stop loss at the last level of support.
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