Never Underestimate the Importance of Price Consolidation
One of my favourite trading strategies is waiting for breakouts from price consolidation. The term “consolidation” refers to a sideways movement of price action within a narrow range for at least 5 days.
Price consolidation often occurs around support and resistance points and once breached, can form one of the most validating indicators that you should enter a trade. But price consolidation can also occur anywhere on a chart. The general rule is, that the longer the period of consolidation, the stronger the move once there is a breakout.
The biggest challenge when waiting for entry signals out of price consolidation, is having the patience to wait for them. When a stock price touches a trendline, your immediate urge is to buy call or put options depending on whether the stock has reached support or resistance and therefore, the direction of anticipated reversal. But I can say from past experience as a novice trader, that I have been burned a number of times as I have watched the price go sideways for a few days and then continue onwards instead of reversing. Having entered an option position, I watched my option contract suffer from a decrease in implied volatility while the price of the underlying consolidated and then fell even more once the breakout in the wrong direction occurred.
I have learned my lesson.
I can’t over emphasise how valuable this simple observation is. Kim Reilly’s DVD Home Study course contains some specific rules and insights on a great little indicator called “Bollinger Bands”. These are like a support and resistance line that wraps around the price movements on a stock chart. Bollinger Bands also measure price volatility over a given timeframe and provide excellent validation for price consolidation.
The best trades often occur when the Bolliger Bands have narrowed together and then begin to expand as the breakout from price consolidation occurs. These are great trades to get into. The narrower the bands, the greater potential for a stronger move on breakout. It’s like pressure has been building and finally it breaks out with a strong move.
If you combine the Bollinger Band indicator with price breakouts from support and resistance levels on a chart, you have really put the odds in your favour for a successful trade.
If you would like to increase your knowledge about how breakouts from price consolidation combined with leveraged trading instruments such as options, can be your doorway to financial independence, I thoroughly recommend Kim Reilly’s DVD Home Study course.