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How to Trade “Consolidation Patterns”
By John Thorpe, Senior Broker
There are a number of consolidation patterns: sideways ranges(rectangles), upward or downward sloping patterns or “flags” , triangular or Pennants. Today I have found on the Continuous Daily Comex Gold
chart to illustrate, several recent rectangle consolidation patterns. One recent rectangular consolidation with a false breakout followed by a confirmed breakout and one that is currently forming. A Consolidation rectangle pattern has clearly defined ranges defined by highs and lows that can be connected drawing horizontal lines.
The above chart reflects just this. There are three points of interest outside the two rectangles, on the first one from March to April there is an upside break out but on light volume, Rule #1. Breakouts
must occur on a closing basis on heavier than normal volume. You should not trade the breakout move on lighter volume. #2 wait for a retest of the previous resistance or support line. You will notice the high volume day after the breakout was on a failure of the retest. Good for you! a win, you didn’t fall for the breakout.
And #3, On April 29 had you worked a sell GTC limit order
at or around the retest level of 1917,1918,1919.00 (which you could have placed as early as April 25th) you would be short the breakout . Soon after, a new consolidation zone is created and we are still currently inside. You can see two bars outside the consolidation but NOT on a closing basis.
In Summary, look for one of these patterns which are some of the most common, Look for a high volume breakout and don’t get in until the market retests the previous support or resistance area, and try to manage your stop loss orders within the old consolidation areas!!
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