OPPORTUNITY 8 – INSIDE CONSOLIDATIONS
Remember, sometimes your prices will be trending nicely, but at
other times you see that prices just move sideways for days. This is
known as “consolidation”, and this also presents a nice trading
opportunity in conjunction with the “surfing” approach.
It’s usually easiest to spot such tradable consolidations when
looking at Hourly charts. Typically, you’ll see that prices are
moving sideways, bouncing around inside a channel between 40 to
80 pips. Of course, when the price eventually breaks out of this
channel it will present nice trading opportunities (see the previous
FOREX Surfing Draft
opportunity section “Consolidation Channel Breakouts”). However
while it remains inside the consolidation channel you can also play
around for some nice profits.
The standard way most traders would trade such a situation is very
similar to how we as “surfers” would do it, except we have a little
more refined technique, and in my opinion, we do it better.
Later in this eBook is a whole section devoted to “reversal signals”
and you’ll learn about trend line breaks, King’s Crowns, and double
tops / bottoms. You might want to pause reading here, go read that
section, and then continue reading here as I won’t review those
topics, but will simply speak of them assuming you understand
those terms..forex sato
Ok, to recap, you’ll see prices locked in a trading range of say 40 to
80 pips (this is the most typical range, but sometime you’ll see
smaller or larger ones). When prices reach near the consolidation
trend lines (usually parallel horizontally, but sometimes has a slight
slant) you start to watch for “reversal signals”. Once you have
found a clear reversal signal then you would look for a suitable
wave to surf.forex sato
So let’s say that prices have been trending somewhat upwards
within your consolidation pattern. Let’s say that prices reached to
be near the top of the consolidation zone. In an ideal world the price
would peak right at your trend line, but in the real world it will
usually peak a little below it. Sometimes it’ll peak a little bit above
it. At that point you’d place an entry order as you’ve learned in the
previous section. If it is a real breakout you could ride it nicely for
some profits, but if it’s a false breakout then your entry order would
be a “dud” (not entered into a live trade) and prices would re-enter
the consolidation channel (maybe revise your trend line to fit it
better, but it’s ok if you have little penetrations if your trend fits
other tops/bottoms better).forex sato
What you should now see is some sort of “reversal signal” as taught
later in this eBook. Once you’ve got a nice reversal signal and you
are confident that prices will now move back down then look for a
suitable wave to surf as prices move towards the other end of the
consolidation channel.
FOREX Surfing Draft
Ok, here is an exit strategy I’ve personally developed over time. I
haven’t heard of anyone using this exact strategy for such
consolidations, but I’m sure that people use some similar idea.
In an ideal world you’d get in right on a peak that bounces exactly at
one trend line, then exit the position as it goes all the way to bounce
at the other trend line. Such situations can and do happen, but
you’re dreaming if you think that you’ll be able to do this
consistently. Most often the price will come somewhat near the
other channel trend line, but you want to get out earlier. It’s better
to go for targets that will more consistently produce profits for you
rather than trying to maximize the profits of your trade each time. If
you try to go for maximum profits then often you’ll find that the
market may turn around on you again and you’ll end up missing
your target exit.
Here is the strategy I’ve developed. I haven’t thought of a cool
name for this strategy before, but maybe for future discussions with
people we’ll call this the ummmm… “Channel Surfing Zones” (Just
made up the name now).
Take a look at the following diagram:
inside blue lines. The green “prices” are there just for a visual. The
red lines represent the channel trend line. These you draw on your
chart as best fit along the highs and the lows.
To draw the blue lines you need to do a little simple math. Grab
your calculator to help you (in the resources section I’ve included a
FOREX Surfing Draft
Microsoft Excel spread sheet that will do all the calculations for
you).
First you need to calculate the distance in pips between your top and
bottom trend lines. Simply subtract the price level of the bottom
trend line from the price level of the top trend line. We’ll call this
your channel height. As stated earlier, most of the suitable
consolidation channels you’ll encounter will typically be between 40
and 80 pips. Don’t bother with small channels of less than 35 pips.
Certainly try this if you encounter a channel larger than 80 pips
(carefully).
Now you need to calculate where you’ll draw your blue lines.
Simply take the number of pips of the height and multiply that
number on your calculator by 0.3 to find out how many pips 30% of
the height is. Count that many pips down from your top red line and
draw a horizontal line there. Then count that many pips up from
your bottom red line and draw a horizontal line there on your
charts. By now your chart should resemble the diagram above with
4 lines going across.
You have now segregated your consolidation channel into three
zones. You now have a “top 30% zone”, a “bottom 30% zone”, and
a “middle 40% zone”.
Let’s now say that prices have moved up into the “top 30% zone”.
You wait until you see a “reversal signal”, and then look for a
suitable wave to jump in on the way down. It is important that your
entry price be within the “top 30% zone”. It’s ok if sometimes you
enter on a wave with your entry price just inside the “middle 40%
zone”, but avoid this as best you can.
Your stop can be either the standard stop for the wave you jumped
in on, or simply place your stop at the price level of the red line. If
you entered a wave within the “top 30% zone” then even on an 80
pip consolidation your stop will be less than 20 pips (notice how I’m
really dedicated to trading with little stops). If the consolidation you
are trading has regularly touched the red line (but not crossed it)
then you might want to consider putting your stop a few pips beyond
the red line for extra protection.
So now where do you exit? Simply set your limit at the other blue
FOREX Surfing.forex sato
line’s price level. Sooner or later the price should cross the blue line
on it’s way to the other end of the consolidation (assuming you
remain in the consolidation pattern). This is a nice “High
Probability” trade. Once you’ve entered the market and set your
stop and limit then leave your computer (or trade on other currency
pairs) as it will usually take a while for your trade to get limited out.
Ok, so now you’ve made a few nice pips when prices reached the
“bottom 30% zone”. What now? Well repeat the process explained
above to catch a wave going back up. If you time things right you
could catch some nice profits zigzagging up & down a few times
before the price breaks out of the consolidation.forex sato
Take a look at the chart below of EUR/CHF over 30 days. The pip
height of the channel is 86 pips. Just looking at the chart visually
how many times could you have profited from this in the past
month? Also notice how sometimes the price as it’s moving across
the channel doesn’t even get close to the red lines, but in every case
it at least crossed the blue profit line.forex sato
One more thing. Notice the penetrations? (Ignore the crazy
Fundamental Announcement blips). If you traded according to the
rules as explained here there is only one place you would have
gotten stopped out at. It’s the last tiny penetration on the bottom
right. For all the other penetrations you should not have yet been in
on a trade since it was still trending towards the red line.
FOREX Surfing.forex sato
consolidation that lasted just 2 days, and is only 35 pips high (barely
worth trading). Again, notice that magic of exiting on the blue line.forex sato
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