Consolidating market definition
In technical analysis, a consolidating market is a market that is neither continuing nor countering a long-term trend. Instead, its price is only experiencing rangebound price activity.
This is also seen as market indecisiveness. A market’s price during a period of consolidation will still fluctuate, but it won’t break out of a certain price range. As soon as the market breaks out and moves either above or below the stagnant trading pattern, the period of consolidation ends.
Sometimes a market’s trend will reverse after a continuation. This is known as a transition. For example, if EUR/USD consolidates after an uptrend then experiences a selloff, it has transitioned from bullish to bearish.
Many successful trading strategies involve identifying and capitalizing on consolidation periods. The aim is not necessarily to trade the consolidation itself, but rather anticipate the market’s next move and benefit from entering the market early before the next move comes. One way to do this is by identifying bullish or bearish flag formations.
How to identify a consolidating market
To identify a consolidating market, look at the longer-term trend of the market and compare that with its short-term price movement. If a market has been consistently rising or falling over a long period (showing an upward or downward trend) but its price is now moving laterally, it’s likely the market will be going through a period of consolidation.
It’s important to allow for fluctuation when identifying a consolidating market. A market can fluctuate while consolidating, but it’s the size of the fluctuations that are significant. While a market is consolidating, it typically only trades between a certain price range and struggles to break away from the bound upper and lower price ranges.
Trading opportunities at this time can be limited. The range-bound price activity means that there are no significant price moves to take advantage of. However, scalpers will often trade consolidation periods despite the lack of strong price movement, as they look to profit in the short-term off smaller fluctuations.