Trading Educators Blog
What is Containment?
Containment is something akin to support and resistance. It is there but it isn't there. All of us have seen prices fall through so-called support like a hot knife passing through butter. We have all seen prices soar through resistance like a run-away balloon.
Actually, support is a place at which a lot of people are willing to buy, therefore, buy orders tend to group at support. This temporarily may keep prices from falling.
Resistance is the opposite of support. It appears at a price where a lot of sellers have grouped orders to go short. This grouping of orders tends to keep prices from rising, at least for a while.
What then is it that containment is trying to describe.
When prices remain "contained," a market can become complacent – and vulnerable to emotional breakouts. So, does containment describe an emotional state of peace and calmness? It very well may!
When prices trade in a range for an extended time, the market begins to depend on those prices. Producers and consumers both make assumptions about income and expense and plan accordingly. Sometimes those plans can include large quantities and extend well into the future, in turn generating other plans contingent on a certain level of revenue or spending. Containment consists of bracketing the highs and lows of trading ranges.
But what if prices break out of that range? Complacency gives way first to surprise, then to denial, sometimes to desperation. The latter can eventually induce panicky behavior, driving prices even further.
What is containment for a trend? Containment during a trend is indicative of steady, unemotional demand in an uptrend, and steady unemotional oversupply in a downtrend. Containment consists of moving average based indicators such as trendlines.
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