long bar move down into congestion

long bar move up into congestion

gap down into congestion

gap up into congestion

Recognizing Congestion

The easiest way to recognize congestion is to realize early that the characteristics of a trending market are no longer in existence.

When the progression of higher highs and higher lows in an up-trending market and lower highs and lower lows in a down-trending market is no longer happening, then you know that something else must be happening. Either a correction is taking place, or the market is entering a congestion area.

The difference is that an overall congestion area will take more than one market swing to identify.

Corrections

a f

Congestions

There are a couple of things that need to be said about congestion areas and the envelope:

Envelope Adjustment

It is possible and acceptable to move the upper limit of the envelope higher when a new high that does not equal or exceed the upper limit of the envelope is made, However, it is important to remember to move the upper limit only, by an amount that is .236 of the incremental change on that side of the envelope. Do not - DO NOT change the lower limit of the envelope unless a new low takes place. For example:

The upper limit of an envelope is 340 and the lower limit is 300.

340-300 = 40 .236(40) = 9.44

340-1-9.44 = 349.44 = upper limit of envelope. 300-9.44 = 290.46 = lower limit of envelope.

A new high is made at 348. The difference or increment between the old high at 340 and the new high at 348 is 8.

8!.236) = 1.89 -I- old upper limit of envelope 349.44 = 351.33 new upper limit of the envelope, NOTE the old lower limit of the envelope is still in place at 290.46. It will not be changed unless a new low is made.

The reverse is true where a new low and no new high is made. The lower limit of the envelope may be extended by .236 of the incremental change in that side of the envelope.

This is a somewhat more conservative approach to trading the breakout. It will reduce profits to the extent that the envelope is now larger. However, it wil! filter out more false breakouts.

Envelope Contraction

It is also possible to take a more liberal approach to trading the breakout from congestion. It wiil increase the profits to the extent that the envelope is now smaller. However it will not fitter out as many false breakouts. This technique sets a .146 envelope around the trading congestion. Simply substitute .146 for .236.

The best way to utiiize the narrower envelope is in congestion areas that are shorter in duration than 25 days, tn this case the shorter the better. The shortest possible definition of a congestion area is one that lasts only two market swings, that is £ market that looks like this:

/\/\ ° llll or one that looks like this:

\/\/ or Mil

As stated, a great deal of nnoney can be made by Just trading the breakout from a range. By placing sufficient contracts per trade on each breakout, I have been able to earn considerable profits without the sweat and hassle of in and out trading.

In fact I do some of both because 1 enjoy trading.

When to Draw the Envelope

This is a most crucial question as will become evident in Part 11 of the manual.

I become extremely suspicious as soon as there is a gap of any kind or a large magnitude of move on a price bar between high and low. That sets off an immediate alert in my mind that a trading range may be just around the corner.

1 draw the envelope as soon as 1 see / or \A on a chart. That is also when I determine what the high and low limits of the trading range are. However, I usually dont utilize the envelope until 21-25 price bars are on the chart. I say usually because there are times when 1 do it in fewer days according to my perception of what is happening in the market. Sometimes the / or \/\ are not all that clear to me. For example, the high limit on the Gold envelope would have been more properly set on the twenty-sixth day of the range, but if you look closely you will see that 1 was looking at / prior to the twenty-sixth day. After the twenty-sixth day, 1 could have restructured the envelope, but I presented the example exactly the way that 1 actually traded it. Recognizing trading ranges takes practice, but I have become extremely adept at it over the years.

The symmetry of / or \/\ is not always quite as clear as I have shown here, one or more of the three legs may be more extended. One or more of them may be flatter than what Ive shown. Experience will dictate when they occur.

One final thing about trading ranges is that sometimes they are much larger from top to bottom than I care to believe. This is where extreme patience comes into play. It looks like prices couid never move so far as to breakout of the envelope. Yet they invariably do, and when they do the moves are stunning. How to trade after the breakout is the subject of Part 11 of the manual.

Obviously if I took only breakouts of trading ranges on daiiy charts, I wouldnt get to do much trading. But I had to begin this manual some way, and at some point. Trading the breakout of a range is a fundamental concept on which some of the remaining parts of the manual will be built. 1 trade regularly, using other concepts under different aspects of the markets, while Im waiting for the breakouts from trading ranges.

In the subsequent parts of the manual, I will be looking at virtually every aspect of a market and showing how I trade it. Part ll will show what to do at tops, bottom, highs, and lows. It wili show how, when, and which kind of moving average I use. It will also show how to use Fibonacci expansions and objectives, among additional concepts too numerous to mention here.

In Parts III through Vt I introduce many concepts, each of which treats a different aspect of markets. Some of these wili seem truly amazing. Ail of them are money makers.