Support and resistance levels create congestion zones around certain price levels. In congestion zones, there is no clear indication if the follow-on trend will be either up or down, as bulls and bears are wrestling with each other for control of price.
A congestion zone on a chart occurs when price is moving sideways, and there is no clear trend up or down. It is not unusual to see days and days of sideways movements on daily charts.
There are times when price has cleared a congestion zone by either breaking out to make new highs or by failing and falling quickly back towards lower price levels.
Adapting your trading strategy to these different conditions can be improved by having a useful trading metaphor or organize your thoughts and remind you of how to interpret price action.
A good trading metaphor should be aligned with your primary learning mode: visual, auditory or kinesthetic. The best metaphors find a way to incorporate all 3 modes, to reinforce the power of the story and the underlying organizing principle.
One of my favorite metaphors does just that: Drive like an Autobahn driver. Here is how it works:
The autobahn in Germany is a marvel of engineering and freedom. For vast stretches of expressways between major cities, you can drive at unlimited speeds. There are multiple lanes, traffic is spread out, and you can see clear road ahead for miles. Driving here is like trading a breakout where you get onboard early and are swept along by the unconstrained power of buyers everywhere, all pushing price ahead at great speed. Enjoy the ride for as long as it lasts, but be conscious of traffic ahead and the inevitably city ahead which will add to traffic and necessarily slow you down.
The autobahns around cities can be very dangerous, and conditions can change swiftly, especially in times of bad weather. Traffic increases, road surfaces get slippery, there are many more exit and entry ramps with both local and long haul drivers each seeking to accomplish their purpose on the road. Not everyone is there for the long haul. People change lanes rapidly trying to gain a momentary advantage which leads to choppy traffic patterns which are unpredictable. This is like trying to trade in congestion areas.
You cannot expect to apply a single set of simple rules to both kind sof road conditions or both kinds of price areas. To be safe and productive, you must adapt your rules to the conditions of the road or the trade. Drive and trade the wide open spaces in one way, to maximize your profits and save time when the conditions warrant such technique.
Drive and trade carefully and in a risk managed way in congestion areas if you must drivce or trade at all. Don’t be hesitant to pull over and let traffic clear before you re-engage. We have the freedom to trade when and how we will and we will be rewarded by waiting for our most favorable conditions to try our hand.
Know what the road ahead is going to be like! Read the maps! Listen to traffic and weather reports and pay attention to the traffic around you to guide you safely and profitably.