The double consolidation pattern strategy occurs as the price is starting to move up off a pullback low. It should only be traded when the stock is in a longer-term uptrend. It signals the pullback is likely over, and a move higher is resuming.
For example, I wouldn’t trade this pattern if the stock just dropped 60% and is an overall downtrend. I much prefer this strategy when the price has had a minor pullback of say 10%, and is starting to turn back up, within a longer-term uptrend. If a stock is volatile, and leaping up 40% or more, then pullbacks may be bigger, like 20% to 30%.
This is a pattern I noticed several years ago. I haven’t seen a pattern like it mentioned in books, videos, etc. It is covered in more detail in my Complete Method Stock Swing Trading Course.
I only use this strategy on the daily chart in stocks. It may work on other markets or time frames but I haven’t checked.
Double Consolidation Continuation Pattern
Here’s how the double consolidation pattern forms.
- Overall uptrend on the daily chart when looking at least one year of data. Since pullbacks can last several months (and this pattern buys while the pullback is unfolding), if you only look at a few-month chart you may think the trend is down
- Pulls back
- Forms one consolidation near the low. The price must move up slightly off the low and then form the consolidation.
- Price breaks above the consolidation and immediately forms another consolidation (2nd consolidation).
- Price breaks above the high of the second consolidation to trigger a long trade.
- Stop loss goes below the low of the second consolidation.
- See How to Set Profit Targets When Swing Trading Stocks for guidance on when to take profit. I don’t take a trade unless the average movements of the stock can offer at least a 3:1 reward:risk ratio on the trade. A trailing stop loss is another option.
Each consolidation should be at least 3 days long, but they may be longer. If you draw rectangles around each consolidation they should be touching or slightly overlapping. We want them close together (but not side-by-side). Too far apart and the strategy loses its power.
A buy stop limit order goes just above the second consolidation high point (after day three). A stop loss goes below the consolidation low.
What volume is doing during the consolidation doesn’t matter too much. When the price breaks out of the second consolidation, it is ideally on larger volume. We won’t know that till after we have taken the trade.
Here is one that occurred in CAAS after a decline in late 2022. For those of you who have taken the Swing Trading Course, you’ll notice that double consolidations will sometimes occur alongside rounded bottoms.
I only trade the patterns in uptrends, but the double consolidations still signaled a forthcoming rally in this stock even as it was chopping sideways during 2022. There was then another signal in early 2023 when the uptrend was more visible (and the stock was on the Swing Trading Watchlist).
Below is another example looking back at declines and double consolidations further back in time.
Here is another example in Tesla as the stock was coming out of a small pullback. Tiny trade risk of about 2.7% (difference between entry and stop loss price).
When to Avoid the Double Consolidation Stock Strategy
Avoid this strategy when:
- The consolidations are side-by-side, or the second consolidation is below first. We want that upward progress.
- The consolidation are ragged or very large (SL will be too large). The pattern is there or it isn’t. if you have to “get creative” or squint a certain way to see it, it isn’t there.
- The pattern is a pullback followed by a slight move up, a consolidation, a move up, a consolidation (consolidations are pretty much stacked on top of each other, not side-by-side or very spread out. Slight overlap is ok), price breaks to upside. That’s it. If there are extra waves, that’s not the pattern.
- This strategy can be good for getting in near pullback lows if the conditions develop; don’t use it if the stock is nose-diving.
How to Scan for the Double Consolidation Stocks
I don’t actively scan for this pattern. It does occur, but I may only find a handful of these trades a year. That said, I would probably find a lot more if I was specifically looking for it.
When I scan for cup and handle and triangle patterns, if I see a double consolidation I may opt to trade it. Similarly, If I’m looking for trend channel trades, the double consolidation may provide an entry for those trades as well. In other words, I use the scanning methods for my other strategies to find Double Consolidations.
The video below discusses how I scan for cup and handle and other patterns, which includes Double Consolidations.
By Cory Mitchell, CMT
To learn more about finding explosive trades, as well as everything else you need to know about swing trading, check out my Complete Method Stock Swing Trading Course.