Market experts say that the market trends around 20% of the time and consolidates for the rest of the 80%. However, when the market breaks out of consolidation it can go either way. So how does one trade such a pattern? How do you minimize your risk?
A conservative trader will simply answer “you don’t”. Trading a sideways trend where the prices range between two support and resistance levels and zones can be particularly risky given the potential outcome if the market decides to flip on the trader.
However, an aggressive trader may see it as an opportunity to catch the next trend from the very beginning. Scalpers may also see a ranging trend as a way to be able to capitalize on the stability of the markets between two levels and zones.
For a scalper to trade a consolidating market, ideally, this trader would be looking into the finer and more minute time frames after identifying a consolidation pattern. They would then choose to go long at the support and short at the resistance with targets being the opposite support or resistance.
The aggressive trader will be looking for a breakout and will be placing stops at levels around the support or resistance. They will be looking to catch the moment where the market decides to go into an uptrend or a down trend and capitalize on the profit.
Though an aggressive trader’s approach may seem risky considering that the market can reverse without giving much confirmation, it is a way of trading that anticipates market movement and price action rather than reacting to the market.
They say that once you have already seen the pattern and confirmation, it is already too late. However, conservative traders will await a confirmation from the market.
Confirmation of a breakout may come in the form of high volumes of trades indicated on the market. Although it shows that the market sentiment may be either primarily bullish or bearish, relying on volume alone is not as reliable.
Therefore, one of the best methods is waiting for the confirmation that the breakout is not indeed a ‘fake’ out, which tends to happen quite frequently. That is why conservative traders will look for a confirmation that shows a support turning into a resistance or vice versa. This will grant them confidence to find a position in the upcoming trend.
Regardless of what kind of trader you may be, the market presents limitless opportunities. The best advice that can be given is to consider your options, your risk profile, and the type of trader you are. Do not be afraid of missing out because the market will continue to move and you will have countless opportunities to trade it in the future.