Market surprises do not occur without prior cause. The breakout seems unexpected because it follows a well-prepared stage when liquidity, positioning, and pressure have been accumulating behind the scenes for a while.
The emergence of momentum can be preceded by the market’s balancing act. Prices become slower, volatility becomes smaller, and traders start putting their orders at clear levels. This market environment may provide more benefits to the experienced trader than any directional forecasting.
Why Markets Accelerate
Quick price action occurs due to an imbalance in the supply-demand equation. When demand overwhelms supply, prices have the potential to rise, but when the reverse is true, they may decline until a new equilibrium can be achieved.
Big traders do not usually enter the market simultaneously. Rather, they accumulate their trades gradually while the market may be tranquil. This is why periods of low volatility could sometimes be significant.
The Role of Consolidation
Consolidation tends to happen before big trends take place. Candles start overlapping each other, volatility drops, and price seems to be moving sideways. This period of low activity often sets up the breakout pattern.
During consolidation:
- Liquidity starts building at the support/resistance points;
- Stop orders begin forming outside the range;
- False breakouts entrap early traders;
- Market intensity increases around key levels
Context Matters
Each breakout may vary in strength. A breakout in line with the higher time frame trend has the potential to show a stronger move than the opposite one. Moreover, breakouts that occur after bigger consolidation may be more impactful compared to small range breakouts.
Indicators such as the ATR may help determine whether potential space remains for movement or whether the expected range has mostly been achieved.
Early Signs of Building Pressure
There are various indicators to tell that the market has potential to expand:
- Drawdowns get less and less
- Price stays close to highs or lows
- There are repeated tests on a particular level
- The reactions of the opposite party get weaker and weaker
That means that one side starts gaining control over the other side.
When Breakouts Fail
False breakouts may frequently occur within various CFD markets. Potential indicators of a false breakout will be lack of follow through, lengthy rejection wicks, and fast return of price within the range. The objective of the move might have been collecting liquidity instead of beginning a trend.
Final Perspective
Moves of great size generally require preparation. Through analyzing the characteristics of consolidation, liquidity, volatility, and market structure, one can learn to trade on momentum that could likely occur in certain situations instead of trading reactively.
Risk Warning: Trading Forex and CFDs involves significant risk and can result in the loss of your invested capital. This article is for informational purposes only and does not constitute investment advice.