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Understanding Trading in Consolidations

Mar 9, 2025

Lesson 4: Trading in Consolidations

Overview

  • Focus on daily and 4-hour order flow.
  • Understand where price is likely to move based on order flow.
  • Use lower time frames (hourly, 15-minute) for trading consolidations.

Key Concepts

Order Flow

  • Daily and 4-hour charts provide insight into market direction.
  • Look for both time frames to align for higher probability trades.

Retail vs. Smart Money

  • Retail Traders:
    • Chase breakouts to establish directional bias.
    • Operate on cause and effect logic without market context.
  • Smart Money:
    • Engineers or fades breakouts of consolidations.
    • Operates based on institutional order flow, not chasing price.

Trading Strategies

  • Consolidation:
    • An area where orders can build up.
    • Price may range for a while, allowing liquidity to accumulate.
    • Ideal scenarios often involve looking for patterns to exploit.

Smart Money's Approach

  1. Buying under old lows:
    • Accumulate buy stops near key levels.
  2. Selling above old highs:
    • Capture sell stops from retail traders.

Order Flow Analysis

  • Determine market direction based on higher time frames:
    • Bullish Order Flow: Expect accumulation of buy stops above old highs.
    • Bearish Order Flow: Expect accumulation of sell stops below old lows.

Breaking Consolidations

  • When price moves outside a consolidation:
    • Retail sees this as a breakout opportunity.
    • Smart money uses this to sell into retail buying activity.
  • Example Scenarios:
    • If daily/4-hour is bearish:
      • Breaks above a consolidation may be a short opportunity.
    • If daily/4-hour is bullish:
      • Breaks below a consolidation may be a long opportunity.

Trading Equilibrium

  • Understand equilibrium as a mean and target:
    • Price tends to revert to equilibrium.
  • Trading near equilibrium allows for lower risk entries.
  • Anticipate price movements back to equilibrium for potential trades.

Practical Tips

  • Be aware of liquidity around old highs/lows:
    • Retail traders often place stops just outside these levels.
  • Monitor daily and 4-hour trends to dictate lower time frame strategies.
  • Always have a directional bias based on higher time frames before executing trades.

Conclusion

  • Focus on understanding the dynamics of consolidation and order flow.
  • Align trades with smart money's actions to increase probability of success.
  • Use insights on liquidity and price behavior to guide trading decisions.

Full transcript