Congestion

What Is Congestion?

Congestion is a market situation where the demand to buy an asset or trading instrument is matched by the seller's supply. This outcomes in the price not moving fundamentally, making the price action consolidated or look blocked. Congestion is a trading range or sideways price movement, showing the balance among buyers and sellers.

Grasping Congestion

Congestion is a supply and demand trading factor that impacts the liquidity and trading price of a security or trading instrument. Congestion is a concept utilized by technical analysts and technical traders.

Technical analysis depends on a wide range of speculations, one of which is auction theory. Auction theory says there are a number of buyers and sellers in the market at some random time, and the price of a stock (or any asset) relies upon the strength of the buyers and sellers.

On the off chance that buyers are more grounded, the stock price goes up as the buyers will pay a higher price. In the event that sellers are more grounded, the stock price goes down, and sellers sell at a lower price. At the point when there is a moderately equivalent balance of supply and demand, then, at that point, the price will trade inside a tight reach with insignificant volatility. This reach is alluded to as an area of congestion by technical analysts. At the point when the price is moving sideways, that is additionally alluded to as congestion.

Reasons for Congestion

Congestion can happen in light of the fact that there are no critical improvements inside an asset, thus buyers and sellers are generally balanced, which keeps the price moderately stable.

Congestion likewise happens during periods of uncertainty. For instance, the price might shoot up, however at that point begin moving sideways. This sideways period is brought about by traders rethinking the outlook of the asset and processing what just occurred. This type of congestion is much of the time short-lived, while in the former case, congestion can last a long time with next to no impetuses to increase the buyer or seller strength.

Congestion likewise at times happens before a major news announcement as most investors and traders are waiting for the information, and in this manner the price isn't moving a lot. For instance, a stock might have a tight reach (congestion) before a highly anticipated earnings release. After the earnings are released, the price is probably going to move fiercely out of the congestion area.

Trading Congestion

During periods of congestion, commonly just short-term traders will endeavor to profit during the congestion. This is on the grounds that the price movements are frequently insignificant, however give sufficient movement to a day trader or short-term swing trader to catch an expected profit.

Trading volume will in general drop off the longer congestion lasts. This isn't generally the case however is the overall propensity. Volume will in general get when the congestion closes. The congestion is over when there is a breakout, normally on bigger than-late volume, and the price moves outside the congestion range.

During a congestion period, the price will move among support and resistance. At the point when the price breaks above resistance or below support, it demonstrates that the buyers or sellers have overwhelmed the opposite side, separately.

A few investors will enter during congestion, expecting that the stock price will keep on ascending after the congestion closes. This is bound to be the case assuming the price was in a uptrend leading into the congestion period.

Different traders might trust that the price will break out of the congestion before entering a trade. For instance, they might buy on the off chance that the price moves out of the congestion price range on high volume. Or on the other hand they may short sell assuming that the price drops below the congestion price range on high volume.

Short-term traders may likewise try to exploit the congestion by buying close to support and selling or shorting close to resistance. They may likewise fade breakouts which have low volume, expecting the breakout will fail and the congestion will proceed.

Illustration of Congestion in the Currency Market

The USD/CAD forex pair — which has a rate reflecting the number of Canadian dollars (CAD) it takes to buy a United States dollar (USD) — had back-to-back congestion areas as displayed in the chart below.

In April, the price was bound somewhere in the range of 1.33 and 1.34. There were minor intraday breakouts of this reach however no closing prices outside the reach. On April 23, the price spiked out of the reach however at that point immediately entered another congestion area. This shows dithering with respect to buyers as their strength was immediately matched by energetic sellers.

On the next major congestion, the price made some genuine progress of the congestion however immediately failed and started to drop. That is a false breakout. The price continued below the bottom of the prior congestion area and kept on dropping.

Two shorter-term congestion areas are likewise set apart on the chart as small congestion areas.

Highlights

• Congestion happens in light of the fact that there are no new improvements in an asset, and subsequently buyers and sellers are balanced. Or on the other hand, traders and investors might be processing a big move before choosing what to do. It can likewise happen prior to a major news announcement as traders anticipate the news.
• Congestion happens when the price is generally stable or moving sideways because of buyers and sellers meeting each other with equivalent strength.
• Congestion closes when either the buyers or the sellers overwhelm the other, and the price moves out of the congestion price range, normally on high volume.