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Let’s continue our discussion of congestion action trading in our series on technical analysis explained.

We cannot exit congestion until we have a new trend run. Without a new trend run, the market is in congestion. Congestion exit is defined as a trend run out of the confines as established by the preceding congestion action.

So, let’s say this again with a little different emphasis.

We can say that congestion action does two things.

One: It creates strong original confines.

Two: it creates strong expanded confines.

The original confines are created by the congestion entrance bar, which is the first bar of congestion action, and the next bar, which is the second bar of action, and the third bar if there is no trend run. The highest high and lowest low of these three bars determines the confines, as defined by dotted line and block level. These are the original confines of congestion.

We should point out here that in the third price bar of the congestion, price does one of two things. Price either:

1) Enters into a trend run, and thus into congestion exit, and trend reversal, since congestion action is not confirmed by the third bar closing on the other side of the PL Dot. The congestion confines are then determined by the original confines, as set out by the highest high and lowest low of the first two bars. OR…

2) Closes on the other side of the PL Dot, and thus continues congestion action. In this case the confines of congestion are determined by the original congestion, as set out by the highest high and the lowest low of these first three bars.

Now, what about expanded confines?

Well, congestion action can create expanded confines by moving outside the original confines of congestion or any subsequent confines, providing that there has been no trend run in the meantime. When price moves outside the latest confines it redefines the confines of congestion. From that point on, any congestion exit deals with this redefined confines, and not the original confines.

(We should note, of course, that the original confines can have an effect on price, since any line or level can do so, but generally speaking, the true confines can be built through repetitive congestion action, without a trend run appearing.)

As long as there is no trend run, the confines can be expanded. Only when price moves into a trend run and exits congestion can we say for certain that the final boundaries of congestion have been defined.

So for Drummond Geometry, technical analysis explained defines congestion in a clear and consistent manner, and gives us a framework that we can work with in identifying the confines of congestion under any circumstance.

In future discussions in our technical analysis explained series we will talk about trade entries and exits in congestions. We will find it useful that we have established the clear definitions about congestion.

Ted Hearne is a Forex and bond trader who has written extensively about trading and has co-authored a “technical analysis explained” course called “Drummond Geometry”. His biography and further information about his work can be found at the technical analysis explained website.