What Is Consolidation?
Consolidation is a period during which an asset's price oscillates within a relatively tight range, neither trending up nor down decisively. Volume typically declines during consolidation, and volatility (ATR, Bollinger Band width) contracts.
Consolidations are often viewed as trend continuation patterns. After a strong directional move, a market frequently pauses to consolidate before continuing in the original direction. Common consolidation patterns include flags, pennants, and rectangles.
The trade is usually to enter on the breakout from the consolidation in the direction of the prior trend, with a stop just inside the opposite side of the range. The longer the consolidation, the more powerful the eventual breakout tends to be — though false breakouts also occur, especially in quieter or pre-news periods.
Related terms
- Breakout — A price move beyond an established support, resistance, or chart pattern boundary.
- Support and Resistance — Price levels where buying or selling pressure historically halts price movement.
- Volatility — A statistical measure of how much an asset's price varies over a period.