Phases of the Market
This chapter will explore the price patterns that constantly reappear in the market place and discuss the participants that create the patterns. It will not only deal with the patterns themselves but the psychology of the market participants and why the action of the traders reveals itself in the constantly repeating patterns.
We know mathematically that when a trade occurs, the market must be in equilibrium. Once the trade occurs, price can go anywhere. What this chapter is going to do is to put the market into phases. It will be a simple concept that can be used in any liquid market. The terms here are not universal, but are unique to this study. Some teachers have different names for them, but for our purposes we will use the definitions described below.
I believe that all liquid markets have the same cycle. It doesn't matter what underlying asset is that is going to be traded, it will go through a cycle. I believe that the initial stage of any market is congestion.
Congestion is the segment of the cycle when the participants are confused by the current price action. The long and the short traders will exchange positions as the strong hands continually change. If you are a short-term trader, this can occur as many as five or six times during a session. Unless you are a countertrend trader (selling as price advances and buying when it ...