In the last article, "Simple And Profitable Method For Trading Breakouts", we talked about finding a Barrier that price has tested and watching it for Breakout. In this article we will discuss a more general topic: how to find key price levels. These levels sometimes get tested several times, until they finally breakout too.
Key price levels are one of the most important technical analysis tools. Finding these levels is very important for us traders. Such levels usually attract price to them. These levels often act as support and resistance. Trends may start, end or reverse there. Also, key price levels are usually good entry, take profit and exit points for trade positions.
In this article we will discuss how to find key price levels. We will use a simple, straight forward approach for achieving this goal. We will analyze the Daily, 4 Hour and 1 Hour time frames. However, you can use the same technique for any time frame you trade. Some recent charts of EUR/USD are also included, for a better understanding of this method and how easily it can be applied.
By the way, this is a very technical method. I think that it can easily be automated. If any JForex (or the newer Visual JForex) programmer is interested, please feel free to automate it. I think that many traders (myself included) could benefit from it.
I hope you will find this article helpful for your trading :-)
► Step 1: Open the Daily Chart
We always start with the biggest time frame. We then slowly work our way to the smaller time frames. In our example the biggest time frame is the Daily, so we will start with it. If you want to analyze a higher time frame, for example the Weekly, just start with it instead.
Here is the EUR/USD Daily chart on the Dukascopy Web Platform:
► Step 2: Zoom Out
We are looking for key price levels. So it is important that we see as much price history as possible. We want to see which price levels play an important role in "the bigger picture" of price movement.
Let's zoom out as much as possible. Just click on the button marked with a magnifying glass and a minus sign (pointed by a red arrow). We click on it several times until we see all price history:
► Step 3: Draw Lines at The Edges
The lowest point and highest point in the chart are important levels. Price couldn't move lower or higher than these levels. This means that they have been strong support and resistance levels for the whole time span. So let us mark them first.
We draw our key levels by choosing "Price Level" from the top menu. Like this:
Then, just point the mouse on the chart where you want to draw the line and left click. If you want to correct a line's location, you can choose it by clicking on it and just drag it with the mouse up or down. The line will follow the mouse's movement.
In the following chart, EUR/USD couldn't move lower than 1.20519. Similarly, EUR/USD couldn't move higher than 1.37137. These are effective support and resistance levels which held well. So they are the first two key price levels we will mark.
Here is the chart with the edges marked:
► Step 4: Customize Line's Color and Stroke Width
Please remember that we want to analyze three time frames: Daily, 4 Hour and 1 Hour. Key price levels on high time frames are more important and more reliable, than key price levels on lower time frames. Therefore, we will use stronger colors and bigger stroke width for the higher time frames:
- For the Daily time frame use the red color and stroke width 3.
- For the 4 Hour time frame use the blue color and stroke width 2.
- For the 1 Hour time frame use the green color and stroke width 1.
After we draw a regular line on the chart, we can customize it by clicking on the settings icon. It is pointed by a red arrow in the following chart:
Then, we can choose stroke width. Just select it from the drop-down list. For example, here stroke width 3 is chosen:
We can also choose whatever color we want. Just select the color from the color selection map. For example, here the red color is chosen:
Here is the final result. Both edge lines are red and stroke width 3:
► Step 5: Draw Key Levels
We start scanning the graph from top to bottom, looking for important price levels. We move the line slowly and look for a price level where the line touches many candles. How many? The more candles the line touches, the better! We will mark the levels where the Price Level line touched the most candles. The line at 1.30786 is a good example. It clearly touches many candles:
Please note that the Dukascopy Web Platform automatically divides the chart to a net of small grey rows. We can mark one key level maximum in every rows. In our EUR/USD example, each row is about 70 pips. Here such a row is marked with two black lines:
The reason for limiting the number of lines in such a way, is to prevent our chart from being cluttered with too many lines. Another reason is that this forces us to find the best key price level in every row, instead of just drawing multiple lines.
We mark every price level that we find. The result will look something like this:
Afterwards, we just customize every line, like we did in Step 4 above.
► Step 6: Open the 4 Hour Chart
We have just finished drawing the key price levels on the Daily time frame. We will now continue to a lower time frame, the 4 Hour.
Please note: we do not close the chart! If we close the chart, all the work we've done on the Daily chart will get lost. We just shift our focus to the 4 Hour time frame.
► Steps 7-10:
Exactly like the steps 2-5 above, but this time for the 4 Hour time frame. The only difference is that we will use the blue color and stroke width 2.
► Steps 11-15:
Exactly like the steps 1-5 above, but this time for the 1 Hour time frame. The only difference is that we will use the green color and stroke width 1.
The final result will look like this:
The red lines are key price levels that we've found on the Daily time frame.
The blue lines are key price levels that we've found on the 4 Hour time frame.
And the green lines are key price levels that we've found on the 1 Hour time frame.
When we zoom in on the 1 Hour chart, here is how the levels look:
► Summary / Key Points
Here is a short Summary / Key Points of this method:
- Start with the highest time frame and move to lower ones.
- Mark lowest price level and highest price levels first.
- Look for maximum number of candle touches.
- Only one key price level maximum, for each row.
- Customize line color and stroke width to visualize the different time frames.
- Can be useful for many trading strategies: good entry, take profit and exit points.
I would love to hear any questions, comments or suggestions. For example:
- What do you think about this method?
- How do you find key price levels?
- Do you have any suggestions how to improve this method?
Thank you for reading this article. I hope you will find the method helpful for your trading.
Happy trading everyone! :-)