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Here we speak of congestion entrance, a type of trading.

We know that the market moves from trend to congestion and from congestion to trend, in a ceaseless, ever-continuing cycle, repeating itself again and again and again forever. This has occurred as long as markets have been in existence and will presumable continue as long as markets exist in the future. The only times when we do not see this cycle occurring are in times of intervention, regulation, or artificial constraint, such as market suspensions, price-fixing, price limits, market regulation and the like – and even then the disruption is temporary. But as long as supply and demand can vary, and as long as human beings come together in trade and act on their differing perceptions of value and opportunity, markets will engage in trends and congestions.

We can call it by many different names. Sometimes we have talked about equilibrium and disequilibrium, some speak of vertical moves and horizontal moves describing the way the chart moves across the page, some talk about distribution being an up movement and development being a sideways movement. But it is all the same.

Trends are moves that carry us progressively in one direction; congestions are market periods where the market oscillates between support and resistance and moves across the page in a horizontal manner.

We saw in earlier articles in our Technical Analysis Explained series that we have a clear definition of what a trend is – it is a series of at least three consecutive bars that close on one side of the PLdot. Since a congestion is the opposite of a trend, we expect our definition of a congestion to be simple as well, and it is. A market is in congestion when it does not close on one side of the PLdot for three consecutive periods. How could it be otherwise? We say the market is either in a trend or not, and we know what a trend is, so congestions are everything else. We reduce the question to dialectic. The market is either in trend or congestion. It is yes, or it is no.

Now we break our discussion of congestion into three separate lessons, and for good reason, as we define three types of congestion – congestion entrance, congestion action, and congestion exit. As you will see there will be a great deal to talk about in each of these three types of trading. But here, as an overview, let’s just set down the definitions.

Congestion entrance trading occurs after the market is in a trend with three consecutive closes on one side of the PLdot, but then the next bar closes on the opposite side of the PLdot. So that bar, with its close on the opposite side of the PLdot than the previous three bars, is the first bar of a congestion, and the first bar after a trend. That is simple, and clear, is it not?

Congestion action trading occurs as the market swings back and forth, closing on one side or the other side of the Pldot as it moves forward bar by bar. We will talk about this in detail in the next article in our Technical Analysis Explained series and so we will just give this definition here and move on.

Congestion exit trading occurs when the market leaves congestion and is about to start a new trend. That makes sense, does it not? And so if the market violates one of the confines of congestion, either the dotted line or the most recent block level, then the market is manifesting congestion exit trading. (We define these terms shortly, so hang in there for a bit.) Again, there is a lot, a very lot, to say about congestion exit trading, and it is a most attractive topic (since it lets you get aboard a trend before there is a trend, so to speak, or during the very moment of its birth). But that is for another time and so we will not deal with it more here. Watch for more articles about this.

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.