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Identifying Trends vs. Consolidation

Trends vs. Consolidation within a Market

One of the best ways to identify if a market is trending, or shows the capability of trending, is to visually scan the chart to determine the following (Over a 5 to 7 candle (session) range):

1. If the white candles out number the black candles.
2. If the black candles out number the white candles.
3. If the number of black and white candles are about even.

If the white candles out number the black candles, youre seeing a bullish trend.
If the black candles out number the white candles, youre seeing a bearish trend.
If the white and black candles are about even in number, youre seeing consolidation.

Ideally, investors should look for and trade markets that exhibit good trending capability. There is almost no opportunity to profit while trading a market that is consolidating (unless the market breaks out of the consolidation with a big rally or sell-off). Ive seen investment strategies where investors buy (or sell) a market while it is consolidating with the concept that the market will breakout of the consolidation at some point. Sometimes these theories work well, other times they dont. I suggest investors try to identify markets that trend for trading. If the market does not trend up and down, then there is little chance of trading effectively.

When any market enters a trending phase, investors should rely upon the candlestick patterns, good protective stop loss methods and the other breakout systems included within the PFP software application for trading signals.

When any market enters a consolidation phase, investors should really study the chart and wait for the optimal signals before investing in the market. The breakout systems, any type of protective stop loss system and even the candlesticks cant effectively trade a consolidating trend. A word of warning, extended consolidation within a market can be very costly to short term investors because the whip-saw activity of the market price will likely generate loss after loss before the market exits the congestion band. It is better to look for another market to trade and just keep you eye on the market that is congesting.


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