Bilateral/Consolidation Chart Patterns Stock Indices
With bilateral/consolidation chart patterns the stock indices market can move in any direction. There are two different types of consolidation chart patterns that form on stock index charts:
- Symmetric Triangles - Consolidation stock indices chart patterns
- Rectangles - Range/ranging market
Consolidation Chart Patterns
Symmetrical triangles are stock indices chart patterns with converging stock indices trend lines that form a consolidation period. The technical buy point from a symmetrical triangle is the upside break, while a downside break is a technical sell signal. Ideally, a market breaks-out from a symmetrical triangle prior to reaching apex of the triangle.
Stock Indices Trendlines can be drawn connecting the lows & highs of the consolidation phase, the trend lines formed are symmetric and converge to form an apex. A breakout should occur somewhere between 60-80% into the triangle pattern. An early or late break out is more prone to failure, and therefore less reliable. After a stock index price breakout the apex forms support and resistance levels for the stock index price. Indices Price that has broken out of the apex should not retrace past the apex. The apex is used as a stop loss setting area for the open Indices trades.
When these consolidation patterns form we say that the stock index trading market is taking a pause before deciding next direction to take.
These consolidation patterns form when there is a tug of war between the buyers and the sellers and the stock index market can't decide which way to continue.
Consolidation Pattern
However, this pattern cannot go on forever and just like in a tug of war one side eventually wins, looking at the stock index chart below see how the consolidation eventually had a breakout and moved in one direction. Now how do we as index traders make sure that we are on the side that is winning?
Break Out Downwards Sell Stock Indices Signal after a Consolidation
Breakout Upward Buy Stock Indices Signal after a Consolidation
Now back to our question, how do we make sure we are on the winning side?
Well we wait until stock index price moves past one of the lines and put buy or sell orders in that direction. After consolidating, If stock index price breaks the upper line we buy, if it breaks out the lower line we sell.
Alternatively if you don't want to wait out the consolidation, you can use pending stock indices orders. If you would like to know more about pending stock indices orders go to the topic: Stop Entry Stock Indices Order Types
The two types of stop order types used to trade consolidation patterns are:
- Buy Entry Stop An order to buy at a level above stock index price.
- Sell Entry Stop An order to sell at a level below stock index price.
These are stock indices orders to buy above the stock indices market or to sell below the stock index trading market.
Rectangle Chart Pattern
A rectangle consolidation pattern is a trading range with narrow stock index price action that forms a consolidation phase in stock index trading market. The trading range is defined by 2 parallel stock indices trend lines which are horizontal & indicate the presence of support & resistance. This stock indices pattern is drawn on a stock indices chart using a rectangle, therefore, the name rectangle trading pattern.
For this consolidation chart pattern, stock index price forms multiple highs and lows that can be connected with horizontal stock indices trend lines that are parallel to each other. This stock indices pattern forms over an extended period of time giving the pattern its rectangle shape.
A breakout of stock index price action from this consolidation pattern occurs when either of the horizontal line is penetrated & the trading range of this rectangle is broken. An upside breakout is a buy signal. A downside breakout is a sell signal.
Rectangle Pattern Stock Indices Trading - Consolidation Pattern
Indices Price Breaks the consolidation range after sometime and continues to move upward after an upwards market break out.
