Consolidation: What is Support and Resistance?

by | Aug 2, 2021 | Blog

In crypto trading, we sometimes talk about “Consolidation” which, in basic terms, is when the price of an asset (let’s say Bitcoin, for example) bounces between 2 well defined levels. This pattern suggests a period of market indecisiveness which ends when the “Support” or “Resistance” line is broken.

What is Support and Resistance?

One of the defining factors of a consolidation pattern is that the price fails to fall below a seemingly fixed level. This bottom line is called the support line. Similarly, the asset’s value will appear unable to push through a higher level. This area which the asset fails to break above is called the resistance line. The aforementioned point at which either of these levels is broken signals the end of the consolidation period.

Support and Resistance in Bitcoin Trading

Support and resistance lines aren’t always at a fixed level. In an upward trend, or a period in which an asset oscillates between 2 levels but generally climbs, the support and resistance levels increase as time goes by. This pattern could also be defined by the terms “Higher-highs” and “Higher-lows”. By the same rule, during a downward trend, these levels will slowly fall, painting a pattern of “Lower-highs” and “Lower-lows”. Ideally, consolidation alone shouldn’t be used as a deciding factor on buying or selling an asset. It’s always a good idea to use multiple patterns to make investment decisions and consolidation doesn’t give us a good idea as to what might happen in the future.

 

 

Why is recognising Consolidation a useful trading tool?

While we don’t recommend using consolidation as a trading signal, it is useful to know how to recognise what’s happening. Apart from the fact we can communicate what we are seeing on the charts to other traders, it’s important to understand the psychology behind what paints these patterns in the first place. An indecisive market is not an ideal market to trade in but there’s always a chance that this period of consolidation could be part of a much bigger signal. If we zoom out (move to the daily chart rather than the hourly, for example), we may see that we are looking at part of a Bull flag or a Cup and Handle.

In Summary

To increase your chances of making better trading decisions, the key is always to increase your knowledge. Notice recurring patterns and look at what tends to follow these patterns. Learning the language that other traders use to communicate what they see on the charts is an invaluable skill. Recognising consolidation as a part of a bigger, more reliable signal will take your technical analysis to another level. Once you can start relying on your own instinct rather than other people’s trading decisions, you’ll find that you will become a far more accurate trader as there is no delay between you seeing the pattern and making your move.

 

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