Forex Focus: Currency Congestions by Brian Twomey
This little-known chart setup can be applied effectively on currency charts.
Some market participants believe that currency markets are trending all the time and picking that one indicator that signals the buy or sell will make you profitable instantly because of the fast nature of these markets. But currency markets are actually more ranging than they are trending. What happens to that one trend that falls prey to a range trade? Did that currency pair fail to break out at the top or bottom of its range? Were you prepared for the failure? A little-known chart setup called congestion, or currency congestion counts, may be just what you need.
CURRENCY CONGESTION COUNTS
Currency congestion can easily be defined as the location on a chart where the currency pair gets stuck in a place where defined ranges become smaller and smaller. It is a place where opening and closing prices are almost the same, where up candles are preceded by down candles and down candles are preceded by up candles. Congestion can last for days and even weeks at a time, causing traders frustration, time, and uncertainty when it comes to direction. Moreover, as time means money gained or lost, you are left wondering where the next move will be, if you will be profitable, and how long it will take.
To determine if a currency pair is in the congestion zone — better known as the fulcrum — count your daily candles and determine where highs and lows are the same price or almost the same. The number of candles within the small range is your currency congestion count or chart count. This is known as the congestion zone. On the daily chart of the euro/US dollar (Eur/Usd) in Figure 1, you can see a congestion take place in the four candlesticks from December 20 to December 24, 2009.
Congestion occurs in two areas. One is after a trend, or a long advance or decline. This is normally a period of consolidation, but uncertainty further hinders the next direction. Yet consolidation and congestion are quite different. Consolidation is nothing more than a short rest for a pair as it gains steam for the next leg up or down. A congestion, on the other hand, doesn’t have a leg. It is just stuck.