A few days ago on Twitter I spoke about Bitcoin's upward sloping consolidation and explained that it was likely to breakdown. I was met with comments such as "Bitcoin is different from other assets", "Bitcoin does not do that in a bull run". The truth is that Bitcoin is the same as all asset classes because the participants are the same (perhaps slightly more emotional than in traditional markets). Let's look at why price broke down, but first a bit about what consolidation is.

What is consolidation? Consolidation is price trading in a range. A range is a neutral pattern which can break in either direction. There is however a greater probability that price will break out in the direction of the trend.

Why does consolidation occur? Consolidation occurs when the market is in balance. During a period of consolidation the market's participants are happy to sell the asset (supply) because they feel it is overpriced. This starts the process of a range forming. As price moved to the low of the range more participants are happy to buy the asset (demand).

Consolidation can take three forms and in an uptrend, downward sloping consolidation is bullish. This makes a bull flag. Upward sloping consolidation in an uptrend is bearish.

Consolidation can take three forms (shown above)

Upward sloping consolidation is bearish and will often lead to violent corrections. This is because price can become overextended and as a result there is no obvious level for buyers to step into the market. Add to this the fact that traders will move their stop loss based on market structure, which means that once these stop losses trigger, it will result in other stop losses triggering and then you have a waterfall type event.

Upward sloping consolidation into yearly resistance (Bitcoin/ USD)

This is why you want to take a trade opposite to the direction of the consolidation. The opposite of this in a downtrend would be a falling wedge type pattern, which is a bullish period of consolidation where price becomes overextended to the downside.

A falling wedge pattern in a downtrend in a bullish reversal pattern.

I hope you found this article useful and can use some of this knowledge in your trading. For more regular updates you can find me on Twitter, where I post regular Bitcoin and cryptocurrency updates.

Happy trading!