You already know that the foreign exchange market is often range-bound. One way the market consolidates before restarting a trend is through periods of sideways movement. Prices often break out of consolidations under the most favorable conditions. However, trading consolidation is challenging. You have to be patient and wait for the right time to strike, and then do it perfectly.
The Consolidation Indicator is a useful tool for determining whether to buy or sell a consolidation. It displays channels like the Ichimoku Kinko Hyo by making use of Fibonacci numbers. Those that analyze the market using channels and are regular users of Ichimoku Kinko Hyo will find this useful.
What is the Consolidation Indicator
The indicator combines the Ichimoku Kinko Hyo and the Fibonacci sequence to make four separate channels on the price charts. By analyzing the market inside these channels, we can determine whether it is likely to break out of its current range or maintain it. You can use the indicator to your advantage when trading currency pairs, no matter how much experience you have or how new you are to the business.
Consolidation Indicator Strategy
The indicator, when applied to MT4 or MT5 charts, will produce a set of four concentric channels. The indicator displays the channels as a set of eight lines. The Fibonacci sequence is automatically used for the coefficient of each line. On the other hand, you can always adjust the value. The indicator plots price channels between extremes, making it possible to see when a trend is about to change direction.
These four channels provide four distinct forms of market-related information.
- Channel 1: The narrowest channel in the middle of the three remaining channels is colored silver. This is why it is referred to as Silver Channel.
- Channel 2: The channel out of the silver color channel has a sky-blue color. Additionally known as the Sky channel.
- Channel 3: This is important because it gives us important information for our trading strategies. You will note that the pricing fluctuates often on the third channel. This channel is known as the Zen Channel. its lines are green in colour.
- Channel 4: The fourth channel is also quite crucial and can serve as price support or resistance. It is known as the Future Channel.
There is no clear buy or sell hint from the indicator. Traders can decipher the signal by reading the lines in the same way that they read the Ichimoku Kinko Hyo. The narrow channel can be used to determine the direction of the market. Breakouts in price find optimal support and resistance at the broad channel’s tiers. On its own, the indicator does not provide us with any indication of whether to buy or sell. However, the charts show that most of the price movement occurs inside the Zen Channel.
The chart shows the price movement of the GBP/USD currency pair. The price action is contained inside Zen Channel’s green area. To enter or exit a trade, you need to wait for the price to reach the high or low of the Zen channel.
Buy Signal
- When the price reaches the bottom of the Zen channel, we can place buy orders.
Sell Signal
- When the price reaches the top of the Zen channel, we can place sell orders.
Consolidation Indicator Pros & Cons
Pros
- You can use this indicator to confirm price breakouts and identify potential trading opportunities.
- It can help you figure out which way the trend is heading.
Cons
- It can’t pinpoint when a trend started or stopped.
- Takes time to understand and practice to master.
Conclusion
If you are interested in trading consolidations, the consolidation indicator is a great tool to have at your disposal. Essentially, 70% of the time, the market ranges. You have two basic options: either trade inside the range, utilizing the channel lines as support and resistance, or wait for the price to break out of the channel. The indication may seem confusing at first, but mastery comes quickly. However, I would only ever test a new forex strategy on a demo account to begin with to see how things go.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
