Trading Congestion Action and Technical Analysis Explained Part 2
May 5th, 2010
Let’s further discuss congestion action trading in our series of articles on technical analysis explained.
Until a new trend run occurs, congestion cannot be exited . Without a new trend run, the market is in congestion . A congestion exit is a trend run as established by the preceding congestion action .
Let’s take a different approach with an emphasis that is a bit different.
Congestion action can be said to do two different things.
One: It creates strong original confines .
Two: it creates strong expanded confines .
It’s the congestion entrance bar by which the original confines are created, which is the first bar of congestion action , and the second bar of action, which is the next bar , and the third bar if a trend run doesn’t occur. The highest high and lowest low of these three bars determines the confines , as defined by dotted line and block level . These are the congestion original confines .
Here is should be brought to your attention that in the third price bar of the congestion price , can do a couple things . Price either:
1) Goes into a trend run, going into congestion exit and the reversal of a trend , since the third bar closing on the PL dot’s other side doesn’t confirm congestion action . The original confines then determine the congestion confines , . OR…
2) The close happens on the other side of the Pl dot, and congestion action is continued . The confines of congestion in this case are determined by original congestion, as the lowest low and highest high of the first three bars sets out .
Now, what about expanded confines?
Congestion action can create something known as expanded confines by moving so it is outside of the original confines, as long as a trend run hasn’t occurring during this time. When price leaves the latest confines, the confines of congestion are then redefined. After this point , then congestion exit will deal with this confines that is redefined instead of the original confines .
( Of course, it should be noted , that there is an effect on price by the original confines, since any line or level can do so , but most of the time, the true confines can be built up through congestion action that is repetitive, without the appearance of a trend run .)
The confines can be expanded as long as no trend run occurs . Only when a trend run occurs and the price goes into a trend run can we say that there is a definition of the boundaries of congestion.
If you look at Drummond Geometry, technical analysis explained clearly and consistently defines congestion , and gives us a framework that we can work with in identifying the confines of congestion under any circumstance .
In future articles in this technical analysis explained series we’ll take a look at entries and exits in a congestion . These clear congestion definitions will definitely become useful .