Trading out of consolidation is actually easier than one thinks if you have the right mindset and outlook at how the market behaves. The two basic elements of technical analysis and the study of chart patterns, in particular, are the concepts of support and resistance and trend lines. The Dow Theory of trends, for example, is based on support and resistance and states that a market is in an uptrend when it makes higher highs and higher lows, and is in a downtrend when it makes lower lows and lower highs. The highs are formed at resistance levels where selling is strong enough to reverse the rally in prices while the lows are formed at support levels where buying is strong enough to reverse the decline in prices. However, support and resistance lines, which are horizontal lines, are often confused with trend lines, which are lines that slope in the direction of the trend.
When the market consolidates sideways you will notice that it trades between the 61 and 38 Fibonacci levels and one could say these are technical support and resistance levels. So how can we utilize this to our advantage…?
By trading the breakout of this range we will know exactly where our intended targets are for some “hopefully” quick profits. Now we all know that the Fibonacci works on all time frames and this strategy can be used on all time frames but it is better used for day trading on the smaller time frames.
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