Identifying congestion areas when trading futures and forex can be difficult for any trader. The proprietary Trend ATR indicator helps to identify these areas by combining the power of the ATR with a special algorithm that identifies “mathematical noise” and helps in identifying congestion areas by plotting small congestion dots. Mathematical noise in trading is when price moves “just enough” to violate a mathematical calculation but does not continue on the path. These are likely areas where congestion forms.
For example, on the chart below, we have 4 areas of potential congestion (yellow lines highlight these areas). Each area was developed because of the mathematical noise calculation. In other words, price closed “just enough” to flip the ATR from blue to red (or vice versa) but failed to continue in that direction. The line of white dots identify this phenomenon so a trader knows in advance that the potential for developing a congestion area is high. Identifying congestion areas, in advance, allow traders to switch from a potential trend following technique to a range bound technique.
Click on the chart to expand.
Identifying Congestion Areas – Entry
After identifying congestion areas, traders only enter if price is near the congestion dot or the ATR (plus sign on chart). Again, using the chart as an example, the trader would enter when price approached the congestion dot on the first two yellow lines with a minimal target at the ATR above. On the third yellow line, the trader would have a minimal loss. At the last yellow line, traders would enter at the blue ATR as it is acting as support for price to go up and test the line of congestion dots.
The line of congestion dots and ATRs are excellent low risk entry points as traders can set stops directly below or above the entry area, as well.