The overall trends in all financial markets are generally divided into two categories: trends and consolidations. Most trading strategies are unique and can only respond to one type of market condition, so identifying which type of market condition is present is essential for profiting from the right strategy.

Today's article will discuss how to differentiate between consolidation and trend markets. The content is divided into three parts:

1. Correct understanding of distinguishing between the two types of market conditions

2. Seven methods for distinguishing between the two types of market conditions

3. Points to note in practical application

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1. Correct understanding of distinguishing between the two types of market conditions

(1) The methods discussed today will better assist you in differentiating between consolidation and trend markets, which can help improve the success rate of trading. However, no single method can accurately distinguish between consolidation and trend with 100% certainty; it can only increase the probability of making a correct judgment.

(2) All market condition assessments are based on assumptions. The essence of trading is trial and error. By using our methods to distinguish between consolidation and trend markets, combined with reasonable position sizing, strict stop-loss orders, and risk control, trading can become profitable.

(3) After distinguishing between consolidation and trend markets, for trading strategies tailored to different market conditions, you can refer to my public account: Eight-Digit Garden.2. Four Methods for Judging Trend Market Conditions

A: After a consolidation pattern breaks, it will enter a trend

The consolidation patterns discussed here include: triangle consolidation, rectangle consolidation, and flag consolidation, which are continuation patterns.

The market always switches between oscillation and trend. The definition of a "continuation" consolidation pattern is that after a trend market goes through a continuation consolidation, it will continue the original trend. Therefore, a break in the continuation pattern will lead to a trend.

Points to note:

The characteristics of this type of pattern are quite distinct. First, there is a clear bullish or bearish trend. After the trend ends, it enters a consolidation phase, forming a triangle, rectangle, or flag consolidation. After the break, the market continues to operate.

Occasionally, this type of pattern may also appear at tops or bottoms, which does not affect trading.

B: After a top or bottom reversal, it will enter a trend

When the market shifts from bullish to bearish or vice versa, it usually goes through a consolidation at the top or bottom. After the consolidation breaks, it typically enters a trend.

Patiently waiting for the trend market after the structure of these tops or bottoms breaks is very meaningful for trading.The most commonly used top and bottom structures are the head and shoulders pattern and the "W" pattern, with rectangle consolidation and triangle consolidation sometimes also appearing as tops and bottoms.

There are also two common "U"-shaped reversals and "V"-shaped reversals; the difficulty in recognizing these patterns is not high, but the difficulty in trading is significant. For instance, after a "V"-shaped reversal, the market moves quickly with few consolidation patterns, making it hard to find technical entry points, and the stop-loss will also be relatively large, making the trade difficult and not cost-effective.

Points to note:

Do not be aggressive in identifying patterns; only trade very clear structures.

Do not be aggressive in trading these patterns; wait for the market to break through before entering.

C: After a fake breakout, the trend will emerge.

A fake breakout is a bullish or bearish trap in trading. We traders detest fake breakouts because often after our orders are stopped out, the true direction emerges, but we no longer have a position, and can only sigh at the market's movement.

However, if we think from a different perspective and wait for the fake breakout to form before entering, it will be a trading opportunity with a higher probability of identifying the trend.

Points to note:

Trading opportunities after fake breakouts are rare, requiring patience. You can screen multiple instruments and appropriately increase opportunities.Market movements that occur after a fake breakout at the top or bottom usually have a larger range, and it is appropriate to increase the risk-reward ratio accordingly.

D: Trends will emerge after frequent moving average crossovers

Moving averages are the most commonly used indicators. The most challenging aspect of applying moving averages to trend trading in practice is dealing with the false signals created by frequent crossovers.

We will go against the grain and say that after moving averages exhibit frequent crossovers, creating multiple false signals, the probability of the market entering a trend increases.

Points to note:

The parameters of the two moving averages should not be too far apart, and they can be used in resonance with other technical indicators, such as top and bottom patterns and fake breakout patterns.

3. Three methods to identify a consolidating market

A: A consolidating market will follow a large one-sided trend

As we mentioned earlier, the market always alternates between consolidation and trend. After a large one-sided trend, the market's forces are exhausted, leading to such a situation.

For example: In a one-sided downtrend, as the market progresses, profit-taking orders will gradually close, buying in, and supporting the bulls.Participants who bottom-fish after a significant drop will bring more and more buying, supporting the bulls. Additionally, the greater the downside, the more long positions will be stopped out, also supporting the bulls. Under multiple resonances, the forces of bulls and bears gradually neutralize, and the market enters a consolidation phase.

Key points to note:

After a major market volume increase, wait for a stabilization signal before considering operations in the consolidation phase.

After trading in a consolidation phase for a while, pay attention to the trend after the consolidation ends, strictly stop losses, and avoid being trapped in the trend.

B: The market is in a consolidation pattern, which is a form of oscillation.

The triangle, rectangle, and flag consolidation patterns we mentioned earlier all belong to this type of oscillating market.

Accompanying the end of a trend, the market forms a regular consolidation structure, indicating that the market has entered a period of oscillation. In practice, traders can capture the high and low points of the consolidation structure for trading by selling high and buying low.

Key points to note:

Among all consolidation patterns, the rectangular consolidation is the easiest trading structure to focus on in practice.

There are not many trading opportunities in a regular rectangular consolidation structure, so patience is required in practice to wait for opportunities.C: Bollinger Bands flatten as the trend consolidates, indicating a sideways market

Bollinger Bands are a very useful indicator. When the market enters a consolidation phase, the upper, middle, and lower bands of the Bollinger Bands will flatten out, forming a state similar to parallel lines.

Entering this state signifies that the market has entered a consolidation phase, and the upper and lower bands of the Bollinger Bands can be used as support and resistance for trading.

Points to note:

Do not use too small a time frame, as the profit space is too small at smaller levels, resulting in a poor trade risk-reward ratio. It is advisable to combine with other technical indicators for trading in resonance.

4. Points to consider in practical application

(1) Determining the market cycle is crucial

In Dow Theory, trends are divided into long-term, medium-term, and short-term trends. Different cycles can conflict with each other, and it is impossible to trade when one moment you are bullish and bearish at the same time.

What to do? There are two options:

First: Trade only in one cycle's trend.Second: There is a relationship of subordination among trends, for example, minor trends obey major trends. Once the major trend is established, minor trends also form the same trend before trading.

(2) Treating trends as oscillations for trading is not a major mistake, but treating oscillations as trend trading may lead to significant losses.

The result of treating trends as oscillations is that orders do not capture a large space, and trading profits are reduced. However, when oscillations are treated as trend trades, after entering the market with the expectation of capturing trend space, if the market does not move, frequent stop losses will occur, leading to losses.

On one hand, profits are reduced, and on the other hand, losses are incurred. Of course, the first approach has more advantages.

(3) It is best to only trade in one type, either oscillations or trends.

A: The trading system must form a logical loop, capable of dealing with only one type of market condition, either oscillations or trends.

For example, a trading system designed for oscillations exits quickly, and after exiting, it can immediately enter the next oscillation trade, making it impossible to capture trend profits.

B: Traders will have an inertial thinking in trading. Trend traders always hope that the market moves more in trends, while oscillation traders hope that the market is always oscillating. This is not necessarily wrong.

However, if holding an oscillation order while also wanting to participate in trend markets, traders will negate themselves, ultimately losing their judgment of direction, and trades will definitely result in losses.