If you follow the market indices closely you will notice that at times after a strong uptrend the market moves away much more quickly, the strong trend stops and the market starts moving within a narrow range. This is not an unusual situation; Occurs when traders suspect positions that are potentially overbought or sold. In the parlance of the stock market, this is called the time of market consolidation.
Stock aggregation is a market condition that refers to when a stock trends within a narrow price range, neither continuing nor reversing the trend. Since the stock price moves in a limited range, it provides very few trading opportunities.
It is really difficult for traders, especially if you are new, to identify the stocks under aggregation. So, in this article, we are going to discuss
What is stock aggregation
Trading in aggregations
Technical traders and analysts consider the consolidation phases to be inconclusive and warn traders to proceed with caution during this time. Most people describe aggregation by rotation without a significant change in value during the aggregation.
Consolidation is a common situation that happens frequently, and it is important to be well aware of it if you are looking to day trade. Here are the key factors to note about aggregation
- the stock in question trades within a limited range during the aggregation phase
- To identify stocks in the aggregation, look for stocks that have stable support and resistance with price moving in a limited range, and those that have low trade volume
- Trading in aggregations depends on how long the pattern has lasted. Although there is a small scope for profit, one can still trade in a range
How to Identify Stocks Under Aggregation?
One can say that a stock is consolidating when the following three conditions match.
- the stock has identified range and stable support and resistance, forming a flag-like pattern in the chart
- The second feature is a limited trade limit
- To confirm if a stock is aggregating, check its volume, which will be low without bounce
Aggregation refers to moments of market indecision when there is no change in price. It is neither positive nor negative. Typically, after a price rally or strong trend movement, the market reverts to a phase where traders become cautious about overbought or sold positions. During this period, the market recovers before another surge or trend emerges. Once you have identified the aggregation, the next step is probably to monitor the surge.
How to trade with Aggregation
Aggregation is bad for directional traders because it deviates from the direction. But when such situations occur, investors need to trade carefully. Here are some tips for trading with aggregations.
Lower Trading Limit
When the stock is subject to consolidation, it does not show strong price movement. Hence, the opportunity for profit gets reduced. Accordingly, investors have to reduce their trade limits to avoid losses. Day traders need to identify trends with potential for achievement during the day. Let’s say you are trading in options, choose call options with low bounce and put with high bounce. By going deep in the money, you can increase profit margins.
Choose Spread Instead
This is easy for you if you are an options trader. If you identify a trader set-up and expect it to produce results in several days, trade in spreads instead of buying single options. The spread may consist of selling a call at a higher strike price and selling a lower strike.
Raise The Level of Conscience
When it becomes clear that a stock has entered the consolidation phase, you can optimize your profit by exiting a bullish trade near the resistance level and book profit. If there are no free trades, wait for the out of trend to confirm.
Aggregation Trading Strategy: Breakouts and Breakdowns
Trend traders need not despair as consolidation almost always results in a new trend on either side. During consolidation it is common for a support level to form new resistance after a bearish breakout or for a new support line to form when the breakout is sharp. Sometimes the aggregation can last for days, weeks and even months. Also, during intraday, it can go on for a few minutes. Before trading in an aggregate, you need to set the duration and confirm the price before trading in the direction of the trend.
To correctly predict a breakout when you are trading intraday, watch the trading software for dynamic updates.
One of the common strategies for trading in aggregations is to check for breakouts or breakdowns.
A breakout occurs when a trend change is accelerated, usually accompanied by an increase in volume. The resistance level turns into new support. Traders enter a long position when the stock crosses the resistance line.
Similarly, a breakdown is a situation when the breakout occurs in a downward direction. The stock moves around for a while and then falls. This is mainly due to the internal weakness of the stock.
While breakouts are normal and good for a trade set-up, it must confirm the following
- The aggregation must have a strict boundary, often in a triangle or pennant pattern
- Moving average is below 200
- A strict trading range
Another trading strategy involves when a stock trades in a range. Sometimes, the stock price keeps bouncing off the resistance and support lines over a time period. In such cases, traders usually look for buying opportunities at the bottom of the range and sell at resistance levels.
Since aggregations are a common occurrence, day traders should learn to identify and trade in aggregations. While trading breakout patterns is a fairly simple strategy, traders should beware of false breakouts, especially after a long consolidation phase.
About the Author- Gaurav Heera is a stock market analyst & trainer with many years of experience in the field. He also heads DelhiCourses, an institute known for its best Technical Analysis Course in Delhi.