While, online trading is evolving and getting more sophisticated, more and more moneymaking opportunities start emerging in the industry. People trade currencies, stocks, indices, commodities, futures, options and other assets and derivatives.
Forex trading is one of the most popular online trading activities. More beginning traders come to test their skills in the rough and highly-competitive environment. Therefore, they should know some of the pitfalls that may affect their trading performance in the long run. Some of the hardest times for trading are periods when the price starts consolidating after a certain momentum. This is the time when most trading strategies fail since they are designed to benefit from trend moves. By they way, experts say that trends occur only 30% of the time. The remaining 70% is the time when the market goes flat (or flattish). This is the time, when the price cannot show any clear direction of the current trend and is fluctuating within a certain range.
That is why it is crucial to know how to behave in flat markets and how to benefit from them. In this article, Masterforex-V Academy experts will share with us some of their valuable tips and tricks.
One again, if we browse the web for the notion of a flattish move or a flat/consolidation, we will get the following explanations:
· Fluctuations within a certain price range.
· The corridor between 2 price levels.
· The absence of any clear trend etc.
Still, most traders forget one simple truth: the price is a balance between the supply and demand. This simple fact leads us to believe that any momentum is an imbalance between the buyers and sellers (the bulls and bears). The price cannot move on its own. The price won’t rally if nobody purchases the asset in question.
Natural questions arise: Can we spot such an imbalance? How can we determine the current market drivers? Yes, we can answer these questions. But you will find out the answers a little bit later.
Now let’s change the point of view a little bit. Momentums and consolidations (flattish moves and trends) are the 2 market states that follow one another.
In order to go deeper into the matter, we will have to introduce the notion of volatility.
Basically, volatility is the speed at which the price moves. In this aspect, trends and consolidation periods have different speeds of price moves. In order to make it simpler to understand, let’s cite an analogy:
Low volatility is when you move from point A to point B by bicycle (and the speed is like 10-15 miles per hour) High volatility, is when you pass the distance by car (the speed is 100 miles per hour). The same difference is represented by the following charts:
The left one indicates low volatility, the right one represents high volatility. Please, pay attention that eventually, in both cases we reached the destination. However, the first case can barely be called comfortable in terms of trading and profit-taking. This is crucial to understand in order to be able to tell consolidations from momentums.
Consolidation Periods: How to Define and Ride Them to Capture Profits?
According to Andrei Mikhalets, an expert working for Masterforex-V Academy, there is a whole range of ways and means to define flattish moves (consolidation). Sometimes they are used together to get better results.
The first one implies the use of volatility indicators. We already found out that trends and flats have different volatility. So we can monitor volatility indicators to spot and use some tendencies shown by them. In order to find out those tendencies for the asset in question, we need to back-test it since the results may vary from asset to asset.
The following indicators can be used in this aspect.
- ATR – the worst candidate but still can do.
- Bollinger Bands – a mediocre indicator for measuring volatility.
- Historical volatility – the best choice for monitoring volatility.
The second way is visual (and more subjective). In this case, we simply look at the chart to determine the volatility of a certain asset subconsciously (by looking at the price behavior). Well, this one may seem weird and even foolish. Still, it may work. When you see several people standing next to each other, you can obviously define those who are taller than others without measuring them with a ruler. The same hold true for the visual way of defining volatility.
Let's test ourselves.
The following chart indicates a mere trend.
Here we can clearly see the price consolidating.
Apparently, this is not the full list of methods that can be used to measure volatility.
And finally, it is crucial to understand the real differences between consolidations and momentums and be able to feel comfortable during flattish markets since they occur most of the time. Moreover, 95% of trading strategies used by Forex traders are designed to trade the trend! Still, most of them lose in the long run. That is why being able to capture flattish moves to take profits gives you a huge competitive edge over the so-called crowd!
If you are interested in more information on the matter, you are free to visit Masterforex-V Academy and attend free webinars and online workshops arranged by it. Good trading and investing!
