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Consolidation

A period where price moves sideways in a tight range, with supply and demand roughly balanced and volatility falling.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Consolidation follows a directional move and precedes the next one. Ranges narrow, atr falls, volume usually dries up, and the chart produces overlapping bars with no clear structure.

Traders treat it two ways. Range traders fade the edges of the consolidation. Breakout traders wait for the range to end, on the argument that periods of low volatility tend to be followed by higher volatility, which is one of the better-supported empirical regularities in price data.

What consolidation does not tell you is direction. Contraction predicts expansion far more reliably than it predicts which way the expansion goes, which is why breakout strategies typically accept a low win rate in exchange for occasional large winners.

Related: trading-range, volatility-contraction-pattern, bollinger-squeeze, volatility-expansion, narrow-range-bar

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