Generally, we as traders want the market to be volatile and make directional moves to book some profitable trades. (Of course, there are strategies you can use to profit from range bound markets; such as Credit spreads etc.). Let us keep those out for now.
Congested market is whenever the price action is range bound, and is moving sideways. If you take a price candle and look at its high-low — that defines the range of the price within that particular time frame. Therefore by definition, in a choppy or congested market, the next price candle will also remain within the range of a prior candle. Here is an example:-
I usually like to see the candle close and take its final shape before classifying it as a choppy candle. This is because the price can easily move above or below the previous candle, but what determines its choppiness is the final shape of that candle.
Always good to show with some real life examples.
Options are quick moving financial instruments, and therefore ideal conditions require that markets should not be congested. To be profitable I like it to move up or down (Just not sideways — as it decays time value that is built-in option prices). Below is a chart of $SPX (S&P 500 Large Cap Index) that I like to trade single-leg options on — (SPX Performance here). I have identified Congestion (Choppy) areas on the chart. Note the range of candles and how they closed in relation to prior candle.
Choppy markets can go on for any time-period. I have found that if three to four consecutive price candles are closing within prior candle’s range, it can be a good definition of Choppy markets.
Personally, I try to avoid trading in congestion areas, but if they appear at support and resistance levels, I have found them to be effective setups as the price tries to breakout of this congestion. Confirmation is key. Because price can break out of the choppiness and either continue its obvious…