Overlapping bars equal congestion
There were several tradable moves at the beginning and the end of the day, but finding a few trades and then giving back the profits during congestion doesn’t put money in your account. The question becomes “How do you define congestion?” I do it by watching for overlapping bars.
In the first hour of trading there were two pushes to the upside, and in both cases the majority of the price gain came from bars that had little overlap. When this is happening, we can use the overlapping bars of a pullback as setups for continuation moves.
But by 8:00 (Pacific) we could see that conditions had changed. Starting with the pivot bar at 7:48, each of the next eleven bars had some portion touching the price level of that earlier pivot. Then we had overlapping congestion. By the time we broke away from one set of overlaps, we were already inside another. You can see this by the yellow horizontal lines on the chart.
How many bars does it take to create congestion? I don’t have a specific rule for that, but I’d say it should be at least five or six. At that point I become a very cautious trader. Notice that by the time you get five bars of congestion, you may already be in a trade. As you can see in today’s example, a long trade would have been profitable. It depends on your trading style whether you want to exit during congestion or to trail a relatively close stop.
