A:

Forex currency pairs, just like virtually any other investment vehicle, go through cycles of movement and consolidation and exhibit recognizable consolidation patterns. Forex traders look for the emergence of these consolidation patterns, because the movement that follows a consolidation phase is often dramatic and prolonged. Knowing how to profitably trade consolidation patterns can give a forex trader a definite edge, as most consolidations offer the opportunity to enter low-risk, high-reward trades, the exact kind of trades that are continually sought by good forex traders. Conversely, not knowing how to recognize and trade consolidation patterns can cost traders considerable amounts of money as a result of making misguided trades. Consolidation can often initially give the appearance of a market reversal, and that can leave traders who fail to recognize consolidation facing the wrong way in a market and thus taking unnecessary losses.

The easiest consolidation pattern to recognize in forex trading happens when the market simply flatlines for an extended period of time. It is unusual for a notable movement in the price of major currency pairs not to occur for any length of time; the major pairs average moving up or down approximately 10 pips an hour even in a relatively quiet market. It is noteworthy on those occasions when the price stays virtually the same for several hours during either of the usually active London or New York trading sessions. Once the market chooses a direction and begins to move, the move that follows is often sustained for a substantial period of time.

Another consolidation pattern that frequently occurs in forex trading is known as a "pennant." A pennant takes the form of a narrowing triangle as time passes. The price trades around the same level for an extended period of time, with the small range of trading becoming more and more narrow. When the price is fully consolidated and comes to almost a complete standstill, it usually decisively breaks out, most often continuing in the direction of the existing trend.

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