You can trade markets by combining congestion phase analysis with candlestick charting patterns. This
technique, a form of pattern recognition, can be used to profit from stocks, commodities and futures.
Holliston Hill Hurd explains.
Three steps are necessary in using candlestick charts for trading congestion areas. First—and it is
indeed a very important first—the trader must understand congestion areas. Second, the trader must
understand reversal patterns within the congestion areas using candlestick charts. Third, the trader must
define when and how to enter the market. For beginning traders, this technique is an excellent
introduction to trading with pattern recognition. For experienced traders, this technique is a new way to
simplify their market perception and might inspire some new ideas to test on a computer.
Above all, it is important to recognize the situation that the market is currently in, which is where
congestion phase analysis comes into play. Most markets are in a congestion situation perhaps 85% of the
time—that is, most of the time —and in a trend run only 15% of the time. Thus, it benefits traders to
study methods for trading congestions. Following are some basic definitions of congestion phases:
Line congestion areas: A congestion area forms when neither the bulls nor the bears are in control of the
market (Figure 1), when the forces of supply and demand keep prices between support and resistance
points of a particular trading range. As supply and demand apply pressure to a range from both the top
and the bottom, together they form a line congestion area. The more time that is spent in a line
congestion area, the more dramatic the breakout and run that ensues will be.