How to Trade Consolidation Periods and Wedges
Hello traders. Welcome to the Scalping course and the third module, Scalping Set-ups. In this lesson, I am going to teach you how to trade consolidation periods and wedges. The reason we are going to try to teach you how to trade them is because…well, we are not going to trade consolidation periods per se because consolidation periods by definition are untradeable.
What we are going to do is we are going to wait for those consolidation periods and wedges to break and then we are going to trade them. The reason that we are making two lessons…one, flag breakouts and the other, consolidation and wedges…is because consolidation periods can be continuation trades or reversal trades depending on when or where they are forming. We are going to go through a Euro-US dollar session, a couple of sessions actually, and I’m going to show you how these consolidation periods can work either on the side of the trend or can work counter-trending. Let’s go to the chart and let’s start analyzing these set-ups.
This is the Euro-US dollar three-minute chart and as you can see, we do have a pretty strong move upward to the downside. Now by definition, a consolidation period is a rectangle or when price is trapped inside of either a rectangle or a triangle. You can see right here that price is trapped inside of this range. The first thing we are going to do is spot these ranges.
Look at the time of day. The first thing you need to do is look at the time of the day. You can see this is during the London session so we do not have a lot of volume coming in from London on the Euro or the Dollar, because we are looking at the Euro-US dollar, but we do have a breakout of this consolidation period right here. Now let me point out the breakout with a circle. Here is where the breakout occurred.
Now the way we are going to be trading these breakouts is not with pending orders. The way we are going to be trading these consolidation periods is with… well, we can use pending orders, but we need to wait for the breakout. The reason this lesson is called consolidation periods and wedges is because, as you can see right here, we also have a triangle when it comes to this formation. Let me just point out where the actual triangle is. This is what we call a wedge. Now we are making higher lows but we are making flat highs, meaning we do have a very strong selling pressure right here, even though the price is moving to the upside.
Now the reason we are going to wait for these set-ups to occur in a certain fashion is because, even though these are MM trades, we are going to use the KIM methodology of waiting for the breakout and waiting for the retest of these zones. This methodology is going to give us a much more exact entry and a tighter stop with a bigger profit target. The first thing we are going to do is we are going to analyze price action.
You can see we are trapped inside this rectangle, but we are also making higher lows which means we are in a wedge or a triangle formation. Now we wait for the breakout and then when the breakout happens right here, as I pointed it out, I am going to use lines as our pending orders because we already have too many figures in our chart and I’m going to thicken this out for you.
We are going to position our entry a few pips above the box,. Right here. Now this is our entry or our pending buy order. The stop loss should go below the previous low. Sometimes the previous low will be touching the trend-line, sometimes it will not. What you are going to do right here is you are going to position your stop loss right below the previous low. You have the previous low right here so you are going to position your stop loss a few pips below the previous low. Why? Price can feel you right here, but it can’t make an attempt to test the previous ascending support of the wedge. We do want to give our trade some space for it to move… well, not for it to move on our opposite direction, but we want to give our trade some space to breathe before it moves in our direction.
Right here, by positioning our stop at this point, we have a very nice six-pip stop loss. Now, where are we going to position the target? We are going to measure the actual load to high of the wedge and then we are going to extrapolate it from our entry zone, meaning that just check this target out, guys and you can see that from our entry point, okay, from our entry point to our target area, we got filled to the pip before price continued to… well, before price broke to the downside, okay? So, you can see that just by being patient and by being extremely disciplined with our trading rules, we have made a profit of 23 pips and we only risk six pips which gives us an almost one to five, well it is a one to four risk to reward ratio, which is awesome when you are scalping because if you can find these trades, two or three trades like these in your session on the Euro-US dollar, you are going to make 75 pips on a day, which means that you are going to be making 375 pips a week, which means that you are going to make 1,500 pips per month just by taking 23 to 25 pips per trade.
Now, just to recap. When you find these consolidation periods, also find the wedge inside of it. Then wait for the breakout, position your buy order if you are looking at a break up to the upside or a short order if you are looking for a breakout on the downside. Then position your stop, calculate your target and the rest is history.
As you can see, price does respect these calculated targets to the pip and the reason price respects these calculated targets to the pip on a scalping base is because not only you are doing this. There is a lot of scalpers out there that are going to be taking profit right here, at this level, after the breakout and then the KIM set-up. Now, this is just another set-up for your bag of ammunition on your scalping system and just remember to be very specific on your entries and to be very disciplined and to always look for every single one of them. Remember that sometimes you are going to get flags, sometimes you are going to get wedges. Sometimes you are going to get breakouts of previous lows and when you get breakouts of previous lows, you are going to take that short trade and then after your targets are hit, price might start to form a bearish flags. Then you are going to take another short trade after the bearish flag or maybe you have a consolidation period after your target set hit and you have to draw the triangle and the rectangle and just wait for the breakout. This is how you are going to start scalping your way to long-term profits just by looking how prices move. And of course this are just the set-ups. On the next module, we are going to go through the entire system and how to use all the indicators that we went through on the second module. So, just for now, we are going to only focus on the actual set-up and then we are going to finish up by wrapping this entire system up.