V.11:2 (70-75): Congestion Phase Analysis With Candlesticks by Holliston Hill Hurd

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:

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.