Bilateral/Consolidation Stock Chart Patterns Trading

With bilateral/consolidation stock trading chart patterns the market can head in any direction. There are two types of consolidation patterns that form on charts:

• Symmetric Triangles - Consolidation patterns
• Rectangles - Range market

Consolidation Setups

Symmetric triangles are chart patterns with converging trendlines which form a consolidation phase. The technical buy point from a symmetric triangle is the upward break, while a down-side break is a technical sell signal. Ideally, a market breaks out from a symmetric triangle prior to reaching apex of the triangle.

Trend Lines can be plotted connecting the lows & highs of the consolidation setup, the trend lines formed are symmetrical and they converge to make an apex. A breakout should occur somewhere between 60-80% into the triangle pattern. An early or late break out is more liable to fail, and hence less reliable. After a price break out the apex forms support and resistance zones for the price. Price that has broken out of the consolidation pattern shouldn't retrace past the apex point. The apex point is used as a stop loss order setting area for the open trades.

When these consolidation setups form we say that the market is taking a break before deciding which is next direction to move.

The consolidation patterns form when there is a tug of war between buyers & the sellers & the market can't decide which way to continue.

Consolidation Pattern

However, this setup can't go on forever & just like in a tug of war one side will eventually win, looking at the chart below see how the consolidation pattern eventually had a break-out and moved in one direction. Now how do we as traders make sure we are on side that's winning?

Break-out Downwards Sell Signal after a Consolidation Chart Setup

Break Out Upward Buy Signal after a Consolidation Chart Setup

Now back to our question, how do we make sure we are on the side that's winning?

Well we wait until price goes past one of the lines & put buy or sell trade orders in that specific direction. After consolidating, If the price breaks-out upper line we buy, if it breaks out lower line we open sell.

Alternatively if you do not want to wait out the consolidation, you as a trader can use pending orders. If you would want to know more about pending orders go to the lesson: Stop Entry Order Types

The two types of stop order types used to trade consolidation patterns are:

• Buy Entry Stop A pending order to open buy at a level that is above trading market price.

• Sell Entry Stop An order to sell at a level below trading market price.

These are orders to open buy above the market or to open sell below the market.

Rectangle Setup

A rectangle consolidation setup is a range with narrow price action that develops a consolidation period phase in market. The price range is defined by 2 parallel trend lines which are horizontal and indicate the presence of support and resistance. This pattern is plotted on a chart using a rectangle, hence thus its name rectangle trading pattern.

For this consolidation pattern, price forms multiple highs & lows that can be joined with horizontal trend lines which are parallel to each other. This pattern forms over an extended period of time, giving the chart setup its rectangle shape.

A breakout of price action from this consolidation setup occurs when either of the horizontal line is penetrated & the price range of the rectangle is broken. An upside break out is a buy signal. A downside breakout is a sell trade signal.

Rectangle Pattern Stock Indices - Consolidation Pattern

Price Breaks the consolidation range after sometime & continues to move upward after an upward market break out.