Consolidation Indicator Guide for MT4/MT5
Consolidation Indicator FAQ
What is a consolidation indicator?
Consolidation is a technical analysis term used to describe a period where the prices of an asset oscillate between a range of highs and lows. In other words, prices are neither reversing nor continuing the current trend. Also, consolidation is another synonym of SIDEWAYS TREND. It is generally interpreted as a sign of indecisiveness meaning that the traders aren’t sure that the asset’s price will go up or down. In other words, they’re neither Bullish nor Bearish. Traders use consolidation indicators to detect non-trending areas. Therefore, consolidation could last a few minutes, hours, or even days and weeks, depending on the asset and the previous trends. Consolidation typically occurs after a sharp price movement. However, a consolidation indication can be broken due to many reasons such as:
- An investor (that could be an institutional investor or a physical person) buys a vast quantity of the asset for a considerable amount.
- Leaks of pieces of information that are critical.
- Political and economic instability for currencies.
- Market manipulation that could be misleading traders into a trap…
How to identify Consolidation phases?
As mentioned above, consolidation occurs right after either a sharp DOWNTREND or a sharp UPTREND. The price movements are low and insignificant, therefore, to identify a consolidation, look for:
- Low volume trades (Look at the bottom of the chart, you can find trading volumes there.).
- Candles near each other in Highs and Low, even if some of them are Bullish and some others are bearish.
- Once the 2 keys mentioned below are validated, look for steady resistance and support levels.
Even if the conditions seem hard to apply, don’t be afraid because the Consolidation indicator would do the job for you, YOU JUST HAVE TO TAKE ACTION.
The High edge and Low edge levels are the limits of the price volatility. The Low edge level is a line drawn on the chart from below, it is the level at which buying is sufficient to stop prices from falling. Thus, breaking the support level would cause a DOWNTREND to start. The High edge level is a line drawn on the chart from above, it is the level at which Selling is sufficient to stop prices from rising. Thus, Breaking the resistance level would cause an UPTREND to start. Once the High edge level or the Low edge level is broken, the volatility of the asset will increase. Therefore, traders could generate a lot of profit in the short term.
How do you trade with it?
Before talking about how to trade the consolidation strategy using the indicator, we need to define some key terms to better understand this section.
Starting with 2 main terms, that we’re going to call: “High edge breaking” and “low edge breaking”.
- The High Edge Breaking occurs when the price is pushed to go through the highest level of consolidation. In other words, the buy orders exceed the supply, making traders pay more to get that asset, certainly, it’s a sign of an UPTREND.
- The Low Edge Breaking occurs when the price is pushed to go through the lowest level of consolidation. In other words, the sell orders exceed the demand, making asset holders offer the instrument for a cheaper price. As a result, a DOWNTREND will follow.
Our strategy is quite simple, BUY when prices Break through the High Edge level and SELL when the prices Break through the Low Edge level.
We’re going to apply our strategy in the next 2 examples:
Example 1 :
In the following example, we can observe that the prices oscillated between the High and low edge levels for a long period then, the shadow of the candle broke through the high edge level on point 1 causing the start of a short-term UPTREND. In this case, the consolidation indicator alerts users of the breakthrough allowing them to take action. However, prices went down sharply, and they started oscillating between highs and lows for a short period.
Then the shadow of the candle broke through the low edge level causing the start of a DOWNTREND. As a result, the consolidation indicator informs users of the potential trend reversal.
Example 2 :
In this example, we can observe that 2 Breakthroughs caused an UPTREND. The 1st Breakthrough occurred slightly after an extremely short-term oscillation. However, the 2nd breakthrough occurred after a long oscillation, causing prices to go even higher than the 1st breakthrough. The indicator alerts users of the potential UPTREND which may allow them to lock in the highest possible profit.
Download consolidation indicator for MT4
The Consolidation indicator MT4 is an extremely efficient tool. Therefore, the Consolidation indicator MT4 will work on every asset and time frame available in MetaTrader4. However, in the following example, we’re going to demonstrate how the consolidation indicator MT4 works. As observed in the below picture, the Consolidation indicator MT4 has detected a potential short-term UPTREND. The Consolidation indicator MT4 has drawn the lines of the High edge and low edge levels where the prices have oscillated for a short period before going UP. Once one of the lines has been broken through, the indicator will alert the trader of the potential trend reversal allowing them to either lock in the maximum highest profit or exit the market to avoid catastrophic losses. In this case, the indicator will advise users to lock in the highest possible profit.
You can donwload Consolidation Indicator for Metatrader 4 via Finansya app.
Download consolidation indicator for MT5
The Consolidation indicator MT5 is a flexible indicator as it works on any asset such as stocks, currencies, or commodities. However, the consolidation indicator MT5 is useful in detecting patterns of a potential reversal. Illustrated in the below example, is a demonstration of how the consolidation indicator MT5 works. As observed, the indicator has drawn 2 lines of the highest edge and the lowest edge, where the body of the last candle has broken through the High edge level line which caused an UPTREND. As soon as the line was broken, the consolidation indicator MT5 alerts users immediately allowing them to lock in the highest possible profit.
You can donwload Consolidation Indicator for Metatrader 5 via Finansya app.
Conclusion
The Consolidation indicator is a really powerful tool used among professional traders to detect patterns of a potential Trend reversal. Those who trade using patterns provided by the consolidation indicator tend to make more profit than other traders. This is due to the sharp increase in prices in the majority of cases. However, the indicator is really useful for newbies and could result in a high profit if used along with other complementary indicators.