Consolidation in trading is when a crypto asset trades between two levels, and the market shows indecisiveness about the next move.
Consolidation in crypto is when a crypto asset trades between two levels, and the market shows indecisiveness about the next move. A break above or below either level ends the consolidation phase and marks the start of a new trend. There can be several reasons for consolidation in crypto, such as markets trying to establish a new equilibrium after a period of heightened volatility.
Consolidation has no limit and can last from days to months. Traders try to identify support and resistance levels during a period of consolidation and pick their trades accordingly. The consolidation phase can end with a breakout to the upside when the price moves past the resistance level or with a breakdown to the downside when the price falls below the support level. The reasons for each individual end of consolidation vary but are often influenced by fundamental factors.
There are several telltale signs for a crypto asset in consolidation.
A consolidation phase is neither bad nor good. Instead, it can be seen as the market trying to establish a new equilibrium and fair price for an asset after fundamental factors have changed. Consolidation in crypto is ended by a breakout or breakdown of the price to either side of the established trading range. The price may test the range several times before decisively breaking out, leaving the decision of whether consolidation has ended up to traders.
Trading consolidation in crypto depends on the pattern. There are three common consolidation patterns: sideways ranges, downward or upward-sloping ranges (flags) and triangular consolidations (triangles, wedges, and pennants).
A sideways range is defined by two clear price ranges to either side, marking the support and resistance levels. This range is the easiest to identify. As mentioned, the market will often wrongfoot novice traders by testing the end of the ranges with false breakouts and breakdowns.
Flags are commonly found during uptrends or downtrends. There are bear flags and bull flags. Bull flags are bullish and paint a downward-trending price before a strong upwards move. Beginner traders can mistake them for a signal for a break of the uptrend to the downside. Bear flags are bearish and paint an upward-trending price before a strong downwards move.
Triangular consolidations form a series of highs and lows where the price consistently trades in an increasingly narrow range. In an uptrend, the bearish retracements become smaller and smaller, signaling that fewer people are willing to sell. On the other hand, in a downtrend, the bullish retracements become smaller and smaller, signaling that fewer people are willing to buy.
Once traders have identified the applicable consolidation pattern, they need to analyze additional factors. For instance, volume analysis tells a trader what is happening during the consolidation phase and what is likely to happen next. During a consolidation phase, volume is usually flat and lower than the times of volatility. A rise in volume can be an indicator of the end of a consolidation phase.
That is why some traders wait for a decisive move past the support or resistance level of a consolidation phase and wait for a retest of the previous level. Only after the previous support/resistance has been confirmed (flipped), can the trader be certain that a new trend or a new range has been established. However, whether a trader chooses to wait for this retest or prefers a more aggressive trading strategy is up to the individual. There is no correct approach, and much depends on the level of skill, experience, and individual preferences of traders.
By combining volume analysis with range analysis and picking the correct spots for entries when the price leaves the consolidation phase, traders can successfully and profitably trade even during times of low volatility.
Join the thousands already learning crypto!