Consolidation Phase: What It Is, Examples

The USD/JPY chart below shows a lot of large consolidation areas and each time price broke out of such an area, it came back to retest the upper or lower boundary of that range. Thus, a trader can either choose to trade the initial breakout – and run into false breakouts frequently – or wait for the retest while fighting the urge to trade and chase the initial breakout. There is no “better” or “worse” – it comes down to the personal preferences of the trader and which style feels more natural to him. When it comes to trading consolidations, there are three concepts traders need to be aware of which make trading more profitable and less risky.

What Are Phases of the Industry Life Cycle?

It’s a strategic move often motivated by various corporate reasons, which we’ll cover shortly. It’s important to differentiate consolidation from a regular stock split, which increases the number of shares while decreasing their individual value. The result of consolidation is fewer shares on the market, and potentially, a higher price per share. This process, also referred to as a reverse stock split, involves merging a set number of existing shares into a smaller number of shares.

1. But consolidated businesses may have an easier time obtaining financing—often at cheaper rates.
2. Higher share prices can sometimes be seen as an indicator of stability and success.
3. In financial accounting, consolidation is defined as a set of statements that presents (consolidates) a parent and subsidiary company as one company.
4. They serve as pauses for traders to get a good look at the price action to decide where the chart could be headed next.
5. This can cause share prices to fall, negating the intended effects of the move.
6. Companies often merge or consolidate segments in order to cut down on costs, achieve more efficient operations or discontinue product lines that are not performing as well as others.

It often has the effect of making a company more attractive to investors. It also decreases competition within the industry because, as new companies stop emerging and the older ones begin to combine, there are fewer total businesses within the industry. Initially, consolidated stocks may have a higher perceived value due to the reduced number of shares and higher price per share. However, the actual value depends on the company’s performance and investor reaction. To identify stocks that have undergone consolidation, investors can look for key indicators. These might include a sudden increase in share price and a simultaneous decrease in the number of outstanding shares without any significant news that would warrant such a change.

This information is often disclosed in corporate press releases or through stock exchange notifications. Following shareholder approval, the company will work with its transfer agent to enact the consolidation across all shares. The screenshot below shows that each time price broke out, or was about to break up, volume showed an uptick. At the same time, whenever we saw a fake or failed breakout, volume was either low or declining.

Consolidated stocks typically trade within limited price ranges and offer relatively few trading opportunities—even on online brokers and trading platforms—until another pattern emerges. Technical analysts and traders regard consolidation periods as indecisive and cautious. Consolidations happen frequently and they are a natural and necessary market structure during long periods of trends or before the existence of a new trend. The consolidation phase is part of the industry life cycle when organic growth in an industry slows. Companies continue to increase their market share and offer customers new services by acquiring or merging with other companies.

How To Trade Consolidations

But consolidated businesses may have an easier time obtaining financing—often at cheaper rates. This is especially true if the newly formed entity is more stable, more profitable, or has more assets to use as collateral. As the industry matured, Facebook worked to consolidate its market share by buying other social media companies that had appeared in recent years.

Pennants and wedges (triangle patterns)

Whereas volume analysis is helpful for stocks traders, the principle of retest-confirmation is especially valuable for Forex trading. Equities often show a runaway what are bear and bull markets behavior after a breakout, but currencies often come back to the origin of the consolidation and “retest” the consolidation boundaries. However, the longer the range, the more traders will start paying attention to it and; long ranges will often have more false breakouts as the professionals try to shake off the amateurs. During long ranges, waiting for a confirmed breakout and not entering prematurely – predicting a breakout – is the key to successful trading.

Whereas amateurs often mistake flag patterns for a reversal, the professionals wait for the successful breakout and the trend continuation. It pays off to know how to interpret and trade consolidations because they happen so frequently. In the mature phase, there is usually a shake-out of successful from unsuccessful companies. In late maturity, companies may begin to consolidate as organic growth slows and they look for ways to increase their market share and juice their growth. During the introduction phase, a company or many companies may be working hard to introduce a new product or service into the mainstream. A market consolidation in financial markets happens when price action shows indecision on the market, with the price trading sideways.

What Is Business Consolidation?

A consolidation is often referred to as a pot where the pressure slowly builds up while somebody is holding down the lit. The longer a consolidation period and the narrower the boundaries of the Success trader broker consolidation, the stronger the subsequent breakout. The most important factor when analyzing triangle patterns is the sequence of highs and lows and how the trendlines of the upper and lower boundary relate to each other. In fact, companies that excel in consolidation tend to excel in their industries. As a general rule, the more consolidated an industry becomes, the more challenging M&A becomes. In banking, for example, banks can easier sell asset management services and mortgages to clients as soon as they’ve acquired them as required customers.

There are antitrust laws and regulations in place to discourage monopolies that may arise as a result of business consolidation. There are various types of business consolidation, including statutory consolidation and variable interest entities. However, there is always a transitionary period between bullish and bearish cycles. Such a period is often called a “consolidation”, where the market is showing signs of indecision with regards to the direction of the price going forward.

The board of directors of a company usually decides on stock consolidation. Flag patterns are typically more reliable when the trend wave prior to the flag has been strong; it makes a trend continuation likely. Again, a trend without proper consolidations often leads to boom-and-bust behavior and then a trend becomes unsustainable.

Before determining how to trade a consolidation, identify how long the pattern has held. If you look for active intraday trading, consult technical analysis software for dynamic british pound to swiss franc information updates. Some consolidation patterns last for days, weeks, or even months or years. These patterns are susceptible to false breakouts, making it important to seek confirmation of prices before looking to capitalize on a trend.