By Taro Hideyoshi
The stocks’ price simply moves in three directions; up, down and sideways. For the stocks that move in sideways, the movement of price is not trending and can be divided into three basic categories: trading in a range, congestion and consolidation.
Trading in a range
A stock that is “trading in a range” means a stock that its price is bouncing up and down between a support level and a resistance level.
When a stock is traded in a range, buyers support it at the bottom of the range (support). When it rallies to the top of its range (resistance), buyers refuse to pay higher price, and some take their profits. So, the price falls again.
Congestion
In technical analysis, a stock which is in congestion area is a stock that its price fluctuates within a narrow price range. The price gets stuck moving laterally.
The congestion patterns form resistance if it falls under a ragged congestion pattern. It is because traders who bought at the high price will take their money out when price bounce near enough to what they paid. Conversely, the congestion forms support if the prices rise above the congestion area.
Because a congestion area indicates an equality of supply and demand, traders are usually told to avoid trading stocks moving in congestion area. It is better to wait until the stock breaks through the upper or lower bound before enters a trade.
Consolidation
The consolidation pattern, unlike the congestion pattern, is a traders’ best friend. It offers opportunities to traders who trade properly.
A stock in a consolidation pattern moves sideways in a very tight price range. The consolidation patterns are usually formed while stocks are building their base or resting during uptrend or downtrend. You will find that consolidations often follow uptrends or downtrends.
The resistance and support levels within the consolidation area are created through the upper and lower bounds of the stock’s price.
Finally at some points, once the price of the stock breaks through the identified areas of support or resistance, volatility quickly increases, a jolt of rising volume and so does the explosion of the stock’s price offer opportunities to generate a profit. If traders are playing in the right side, they can profit mightily when the price explodes.
The longer a stock traded in consolidation area, the more explosive the stock moves upside or downside when it breaks resistance or support level.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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