Trading Basics: Evolution of a Trader

HORIZONTAL CONSOLIDATION REGIONS

I tore apart horizontal consolidation regions (HCRs) in Trading Classic Chart Patterns, so you can reference that book for the details. A HCR is just as it sounds, an area or zone of flat price movement. To qualify, the region must have at least three peaks or three valleys sharing the same price, and they should not be spread across the known galaxy.

I measured the effectiveness of HCRs by finding them from the trend start to the start of a chart pattern (on a time basis, and from the trend start to the top or bottom of a chart pattern on a price basis), when the breakout placed price in the path of the HCR.

For example, price started trending lower, formed a horizontal consolidation region, and then continued to a double bottom. When the chart pattern broke out upward, price climbed and reached the level of the HCR. I measured how often that type of behavior occurred and found the following.

• Support or resistance does not grow weaker over time. If the HCR was near the chart pattern breakout, price often pushed though nearby resistance or support. HCRs' ability to stop price movement increased for about a month and then oscillated up and down thereafter (for up to 530 days, with no real change).
• HCRs below a chart pattern were slightly better at stopping a decline than were HCRs above the chart pattern at stopping rises. With HCRs 70 days from the start of the chart pattern, they stopped price 47 percent (upward breakouts from the chart pattern) ...