Consolidation is a term used in technical analysis for an asset that is not trending upwards or downwards. Generally, consolidated assets or cryptocurrencies trend within a limited price range and give relatively minimum trading chances until a different trading pattern emerges. The term better describes a flat market situation in cryptocurrency, stock, and foreign exchange markets.
When a market enters a consolidation phase, it only deviates into a very low range. If there was a rectangular box presentation, the price is within the peaks and the valley inside the box.
In other terms, the market pauses for a given time before gaining momentum. Most traders don’t realize when the market is consolidating!
In this article, we will explore why consolidation is good for crypto trading, how you can identify it, and what to do when the market is consolidating.
As a trader, you earn profits by identifying potentially profitable trends in the market. Typically, market consolidation is not limited to specific time frames and can occur at any time. However, not all consolidations in a timeframe are ideal for trading.
The best approach is trading in larger time frames (i.e. Daily) because shorter time frames could be riskier. You don’t have to use indicators, but you can visualize these consolidations. As a result, you can use price peaks and price lows on the daily timeframe that forms in the consolidation phase.
Using our “rectangular box” example from above, as a trader, you can grab the opportunity to sell at the top of the rectangle and buy close to the bottom. During market consolidation, traders take their time to make assessments that help them adjust to future strategies.
So why is the market consolidation phase good news for crypto adoption?
The crypto industry is always hyped. But when the market consolidates, traders can now check into the benefits they gain from the higher asset prices.
Different cryptos compete differently in crypto exchanges such as the Coinbase trading platform. For instance, when the Dogecoin cryptocurrency market cap was $50billion, traders found it hard to identify market actors who could believe the evaluation would have a meaning for future adoption. Later on, Tether, an Ethereum token, solidified its position and became one of the largest stable coin by raising share capital of $50billion.
The crypto productization is more real than it was thought. In 2020, the industry traders predicted bitcoin growing interest from organizations in particular. The events have taken a turn as institutional investors largely control the current market.
On Ethereum and Defi, stakeholders also forecasted growth of interest. Given that in 2022 the crypto market will be controlled by institutions, it’s no surprise that the analysts are still making more predictions for more adoption of cryptocurrencies. Partly, the move should be driven by the increasing inflationary fears and the growing normalization of Crypto, which is also pushed by new ETFs (exchange-traded funds). It’s more likely that after the launch of the BITO ETF, regulators across the globe would find it hard to resist the increasing adoption of market cryptocurrency.
The only thing lacking in major marketplaces is adopting effective policies that encourage traders to implement crypto solutions. Some citations identify this hesitation with the volatility and investor damages. Such allegations seem not to hold water since the price discovery process in the crypto market is a central and important part of free trade. Simply put, straightforward policies would make the industry more approachable and understandable to novice traders.
There is no certain and defined method to identify the start of consolidation. Mostly, it’s usually after noticing that it was a consolidation, and by the time you think again, you have already lost the account. Here are four tips to predict a market consolidation.
Understanding support and resistance levels is an easier task for traders. The Kraken platform has the best beginner guides. You may not realize that major support and resistance are key for market consolidation. When the price goes to the major support level, anticipate a market dormancy. So what collectively constitutes major resistance and support levels?
They are levels that:
● You identify in daily, weekly, and monthly timeframes
● Their price can go on one-two or two previous occasions tested these levels
● The price has moved significantly, meaning from 500 to 1000 pip ( price interest point.) moves.
Major political events determine the forex or crypto market changes, with trades going into consolidation. When trading, ensure that you go by the forex factory calendar and identify any major news that may affect the trade.
You can identify market consolidation by checking the holiday market. During holidays, the traders are off the market, meaning a low market volume, which translates to low volatility and consolidation.
As a crypto trader, you must internalize the structure of a trading market. The moment you notice price behavior differs from trends, you must determine whether the market is getting consolidated. Normally operating markets create high and low curves as the trend moves on.
Trading When the Market Is Consolidating
There’s only one secret! Trade on larger time frames. Market consolidations mostly prevail during smaller time frames. But trading in larger time frames like daily would help you evade price consolidation.
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