Daily Forex Signals: Consolidation Can Be Used to Your Advantage

Daily Forex Signals: Consolidation Can Be Used to Your Advantage

Consolidation Can Be Used to Your Advantage

If you have traded currencies for very long, you will notice times when price action seems to tighten up. If you drew a line along the falling highs and rising lows, price would look like a coil getting tighter and tighter.

A popular way to measure this consolidation is to look at a bollinger band that has been applied to the chart. If you load a EURCHF chart for 2009 you will see that the weeks leading into mid December was the tightest it has been in ten years. It actuall constricted to an amazing 23 points wide on the daily charts. Today's width of 53 has been hit 9 times in the last 10 years and in four of those years that contained 8 of those touches, the entire year was either consolidative, or reversed a prior years move.

Since this year was certainly consolidative, this points to a serious break out to the bottom continuing last years CHF strength or a reversal of last years CHF strength. Now that the case for the soon to come breakout is established, a look at possible direction is in order. A price channel break of the lower line suggests that further weakness is in store, and currently the PSAR supports that move with a stop around 1.5128

Whether you are looking for price to pull back or break out, finding consolidation area can be very effective when looking for trade opportunities in the Forex market. Use this consolidation to your advantage by trading breaks in the support and resistance of the coil, or top and bottom. Make sure that you also back test this strategy by using software that allows you to do so.