Consolidation Patterns in XAUUSD Trading

With bilateral/consolidation patterns the market can move in any direction. There are two types of consolidation chart patterns which form on the Gold price trading charts:

• Symmetric Triangles - Consolidation patterns
• Rectangles - Range/ranging market

Symmetrical Triangles - Consolidation Chart Patterns

Symmetric triangles are commonly referred to as consolidation patterns.

Symmetric triangles are chart patterns with converging trend lines that form a consolidation period. The trading buy point from a symmetrical triangle is the upside break, while a down-side break is a technical sell trading signal. Ideally, a market breaks out from a symmetrical triangle before reaching the apex of the triangle.

Gold Price Trendlines can be drawn connecting the lows and highs of the consolidation phase, the trend-lines formed are symmetric and converge to form an apex. A breakout should occur somewhere between 60-80% into the triangle pattern. An early or late breakout is more prone to failure, and hence less reliable. After a price breakout the apex forms support & resistance areas for the market price. Price that has broken out of the apex shouldn't retrace past the apex. The apex is used as a stop loss setting area for the open XAUUSD trades.

When these consolidation chart patterns form we say that the Gold market is taking a break prior to deciding next trend direction to head.These consolidation chart patterns form when there a tug of war between the buyers & the sellers & the market cannot decide which way to move.

Consolidation Pattern

However, this pattern cannot go on forever and just like in a tug of war one side eventually wins, looking at the price chart below see how the consolidation eventually had a breakout & moved in one direction. Now how do we make sure we are on the winning side?

Consolidation Chart Pattern - Break Out Downwards - Sell Trading Signal after a Consolidation

Consolidation Chart Pattern - Break Out Upwards - Buy Trading Signal after a Consolidation

Now back to our question, how do we make sure we are on the winning side?Well we wait until price of XAUUSD moves past one of the lines & put buy or sell orders in that direction. After consolidating, if the price breaks upper line we buy, if it breaks the lower line we sell.

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

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

Buy Entry StopAn order to open buy at a level that's above the market price

Sell Entry StopAn order to open sell at a level that's below market price

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

Rectangle Pattern

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

For this consolidation chart pattern setup - the market prices form multiple highs and lows which can be joined with horizontal lines that are parallel to each other. This pattern forms over an extended time period giving the pattern setup its rectangle shape.

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

Rectangle Chart Pattern

Gold price breaks the consolidation range after sometime and continues to move upward after an upwards market breakout.

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