If a currency swing in a relatively tight price range (10-20 pips) for a long time (a few hours or more) it is said that the currency is in consolidation. If we zoom in a 4-hour consolidation by charting short time frames (for example 15-minute charts), we can see several zigzag moves. As soon as we zoom out the same consolidation to a 4-hout charting, that consolidation transforms to a single 4-hour dwarf candle (that may have equal head or tail spikes). So, charting time frame can hide or show a consolidation. Moreover, any short range equilateral candle in any time frame is a consolidation if it is charted in smaller time frames.

1. 4-1 Consolidation and Breakout
If a currency swing in a relatively tight price range (10-20 pips) for a long
time (a few hours or more) it is said that the currency is in consolidation.
If we zoom in a 4-hour consolidation by charting short time frames (for
example 15-minute charts), we can see several zigzag moves. As soon as we
zoom out the same consolidation to a 4-hout charting, that consolidation
transforms to a single 4-hour dwarf candle (that may have equal head or tail
spikes). So, charting time frame can hide or show a consolidation. Moreover,
any short range equilateral candle in any time frame is a consolidation if it
is charted in smaller time frames.
If we take a look at the behind scene, it will be found that consolidation
happens actually when economical forces reach a very tight balance. Positive
and negative forces fight each other to overcome and push the price up or
pull it down. During a consolidation period this does not take place until
one of the forces wins and causes a fast, big move. Such a move is called
breakout. In other words, breakout is the release of currency from a tight
consolidation range and heading fast upward or downward seeking to reach new
price levels (usually at a strong support or resistance). General rule is
that the momentum of a breakout depends on the duration of its consolidation.
Longer time consolidations usually signal that bigger breakouts are on the
way.
Now, the question is when a breakout will happen and what will be the
direction of the move. The answer is a breakout happens when the involving
economic forces get out of balance and it goes to the direction that the
winner forces determine. To know about these forces we need to learn more
about economy, currency dynamics and forex fundamentals.
4-2 Local Maxima and Minima
During the study of consolidation or support and resistance we note that the
price goes up and down in a short range (10-30 pips). These price levels are
local maxima or minima. To take out the most from our trade and gain the
maximum profit we should always wait the price reach its local minima to buy
and its local maxima to sell. This way we will earn 10-30 pips more profit in
each trade. Moreover, in setting stop loss, we should always consider local
maxima and minima.
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