The most important thing that any forex trader should remember about consolidation periods and patterns is that they can explode like dynamite, and their explosions in the forex market consequently lead to immense profit opportunities. Consolidation periods are invaluable in terms of capturing the potential, since the burst of a flowing directional price action can last for quite a long period of time.

Realizing what consolidation patterns are and trading on them provides a forex trader with two advantages. The first is that a forex trader can hold initial positions for shorter periods of time and shrink the risks of holding positions for too long if the higher rollover interest occurs. The second is that usually such positions can have very high profit potential, in case a forex trader is keeping to the disciplined and strict money management.

There are two main and most popular consolidation patterns in forex trading: the flag formation and the broadening formation. Flag formation is very common in forex trading and provides a great avenue for profit. It serves as a continuation pattern, that is, points that a trend is likely to continue. Flag formation happens after a considerable uptrend and is generally viewed as a stopping point before the following increase of momentum. In flag formation the consolidation period doesn’t last for a long time and, what is more, it is likely to be contrary to the preceding uptrend direction.

The same as with the flag formation, the broadening formation is also characteristic of an uptrend, however, the difference is that it points not to the continuation of the trend, but to a reversal. The broadening formation is excellent for setting up a bottom of a downtrend or a top of an uptrend. As a result, it after a top or bottom is established, it becomes easier to predict a close reversal of the price action. At this point forex traders are consolidation their positions be setting up lower and upper trendlines. Though, the swings appear to be larger and longer in comparison to the preceding fluctuations. The tough clash between sellers and buyers finally comes to an end when the currency price action breaches the upper or lower boundary and bullish or bearish momentum is established.

Both flag and broadening formations and corresponding forex trading strategies can be widely used by beginning and experienced forex traders, though for novices is better to try first with forex trading systems. They allow to isolate immense avenues for profit for a short period of time. While the flag formation provides trading opportunities based on continuation pattern, the broadening formation is based on reversal patterns. However, using these two types of consolidation patterns, a forex trader can take a great advantage of the great directional bias that always follows the consolidation.