Currency markets have inherent levels on which selling or buying activity persists. Identifying such levels allows based on historic performance allows to sell or, respectively, buy from such specific levels. However, selling levels can be broken through once many attempts to test the level have been made and the amount of selling from the level decreases with time. Conversely, the same can apply to buying levels.

Reaction patterns on such levels reflect the amount of “firepower” on such levels. As the “firepower” dwindles, so will the possibility of recurrent selling/buying from such levels.

Selling/buying levels are not pip-precise. On the contrary, they have a certain leeway of 10-20 pip depending on the currency and only in very unique cases are actually pip-precise. Movement beyond the buying/selling level and return back are sometimes called “false breakouts”.

The key to understanding the movements towards the key buying/selling levels is the trading volume which leads towards the “significance levels”. If the volume leading towards the significance level is increasing and is significant, then there is a higher chance that the level will be broken, even if not immediately, but after a 2nd or 3rd test. Low trading volume leading to the “significance level” means it is safer to presume that “significance level” will stand the test and respond in expected manner ( that is, either buying or selling). However, numerous tests on low trading volume with “decreasing firepower” response, will also lead to the “significance level” being broken. Note that the trading volume should be judged using currency futures and not any specific broker spot volume. You can use available platforms to review the currency futures volumes (e.g. Trade Station or ThinkorSwim) etc.

Let’s review a couple of examples on 1h, 3h, or 4h levels, as those are much more significant compared to lower timeframes of trading (10m or 30m charts).

This chart clearly shows a selling level on 1.1375 on EUR/USD futures or about 1.1360 level on EUR/USD spot respectively. You can see exactly 5 touch points from this level where the vertical dotted lines separate different days. It is clear that the first 3 touch points are very reactive, we see smaller trading volume leading to the selling point of 1.1375 and then much bigger volume on selling bars from this level. At the same time, we can notice that the trading volume selling from this level decreases in the 3rd and 4th touchpoint and it is getting broken on the 5th touch point by increasing buying volume. Especially 2nd and 3rd touchpoints show that the selling volume decreases, thus identifying that the firepower to sell from this level decreases. Even though the tests of this level come on small volume moving up, initially indicating no interest to buy more, the selling volume also decreases. Thus it was easy to break the level on the fifth touch point, with inceasing buying volume since all that could sell from 1.1375 was already sold.

Let’s look at the most recent example with EUR/USD again on the futures chart. Here you can see clear selling from 1.1450 level twice, with the previous “hump” selling on both 1.1450 and 1.1425. When the price was approaching 1.1425 and 1.1450 again, with the second “hump” as is seen on this chart, one could observe the market behavior on a lower time frame to identify if selling was indeed taking over to also short again from those levels:

If you were to look on the lower timeframe for 1.1450 and see that even though the movement up has been on inceasing volume, there was a nice selling bar on increasing volume within a 10m chart confirming that selling still exists here and short here respectively.

Happy Trading!
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