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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.

Traders love a good trend. Everybody wants one, for their very own, and understandably so, since a great deal of money can be harvested in a good trend.

But how do we trade a trend? Well, there are a number of tactics that one can use. (Some old traders say that trends are easy since any old trading plan will work. Because prices are always moving in one direction, even if you enter with a poor trade position, it makes no matter, since the trend will bail you out in the end. There is some truth in this old maxim, but nevertheless there are a lot of refinements that we can bring to trend trading.)

One of the first things all market analysts learn is that technical analysis explained how to recognize a trend as early in its existence as possible, and that one definition of the trend, based on the relationship between the close and the PLdot, lets us do that. You will recall perhaps that the definition is three closes on one side of the PLdot defines a trend. After the third close you are in a trend.

This is important because the best, the strongest, and the richest part of a trend is often the earliest part, when it first gets going. Then, once you recognize a trend the thing is to hang with it as long as it exists. If your trading situation permits, you want to add to your position by pyramiding, so that as the trend develops your profits also grow more rapidly.

Surely getting aboard a trend and hanging on tight is one of the best ways to make money in trading. If you have learned nothing else in your education, you should at least know that how your style of technical analysis explained trend formation is one of the basic building blocks of any trading system.

All well and good, you say, but how exactly does one time the entry to a trend? And how do you manage a trade in a trending market?

Of course trends are not all the same, some are slow and some are fast and others are old and some are young.

First we will consider the fresh new trend. The market has been in congestion for some time, perhaps for many days if you are a swing trader, or for many hours if you are a day trader. The parameters of the congestion are clear to you. Then suddenly there is a change in conditions, frequently (but not always) news driven. The market starts to move rapidly on one direction.

This is a situation for rapid action. Enter in the direction of the trend as soon as you can and hang on. The exact point of entry is less critical than the fact of getting aboard. This is a move that will last for many hours or days and the sooner you are aboard the better! You can buy into this trend as it breaks the congestion parameters or as the next bar retraces to the top of the trading bands. If it is a real trend based on fresh new energy, you won’t see any retracements deeper than that for quite a while!

Contrast this to a mature trend that has been going on for a while. Can you still get aboard? Yes of course, but if the energy is “mature” and starting to lose a bit of its oomph, then you will need to be more cautious in your entry techniques. In this case you should be looking for a pause in the trend, a price retracement to the midline of the trading envelope at least. Check on your higher time period to make sure there is sufficient potential left in the trade, enough to make it worth entering this no-longer-fresh trend. I usually use technical analysis tools and methods when trading and in this case the retracement would be to the neighborhood of the PLdot.

If you are uncertain about these guidelines some time spent examining a chart will surely bring your understanding to a higher level. And most traders can benefit from a detailed look at technical analysis explained in a training course of their choice, as they hone their entry and exit skills.

Next time we’ll talk about entering and exiting congestions.

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.

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.