Forex market is very volatile and can move quickly and unexpectedly. But sometimes market can take a rest, or someone would say the market is sleeping, which means it is consolidating, accumulating or moving sideways. Why does this happen to markets? This process can have many reasons, but this article will touch upon the basic two reasons for markets consolidation.
The first reason for Forex market to accumulate or consolidate is when all countries are expecting something important to happen and traders stop their trades in anticipation of essential market moves or breakouts after the world event. When the trades stop happening on the Forex market, it starts to consolidate on a small trading range. These tight or small trading ranges might move between 20 and 60 pips. You can see these moves on shorter time frame charts like 30 minutes charts.
The second important reason for the currency market going into accumulation mode is in case a big central bank is going to intervene in the Forex market in order to support its currency. Very often central banks think that the currency is depreciating or appreciating too much. So in order to stabilize the currency exchange rate banks make a decision to intervene in the market. Global market gets to know the news fast and it quickly starts to consolidate expecting the major market move. Central banks Forex market intervention is typically done to boost the countries’ exports or reduce the imports’ prices for the country.
Let’s look at the following example. Let’s consider Japan as the one of the biggest economies of the world. The market watches every move of the Japanese Central Bank. Sometimes the bank has to get involved in the Forex market in order to stabilize the countries’ currency – Japanese Yen. Let’s imagine that Japanese Central Bank intervenes into the Forex market in order to stabilize the Japanese Yen between 110 and 115 JPY to the US Dollar. This range estimates 500 pips. So the bank wants the currency pair JPY/USD rate to fluctuate between these 500 pips. The market can anticipate this intervention and it might take days or weeks for the bank to intervene in the market, which is why everyone on the Forex market watches very closely what the bank is doing.
When this happens, the market usually enters an extended period of moving sideways, which may last weeks or months. During this time you might find large trading ranges in the market, which could be observed on the daily chart.
Forex market gets often locked in such consolidation periods and you, as a trader, should definitely learn how to handle trading these ranges. You can get a lot of rewards by learning how to trade during consolidation market movements.
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