On my last article I've wrote about
price levels. I tried to give basic understanding
about levels and how I classify them. In this article I am writing
about “Price Action” levels and how to trade them. These levels
are found not using any calculations or complex formulas. They are
found only from a chart manually.

are Price Action levels

Forex market (the
same as any other market) is driven by supply and demand. If we have
more demand than supply – price rises, if more supply than demand –
price falls. In financial markets large funds, banks or corporations
have interest at particular price – they buy or sell currency. So
they create supply and demand zones. It is not possible to fill a
very large order at the same price – because large orders move
markets. So market movers fill as much as they can at predefined
level and when price moves out of bounds, they stop buying or selling
currency and wait for price to come back. These zones are formed with
stop loss or take profit orders too (basically stop order is also
selling or buying currency).

Correctly found
supply and demand zones always influence price. Even when we have a
very strong fundamental factor, price reacts to these zones. There's
price action during Non-Farm Employment Change release at May 4th
below in a tick chart. As we can see even during such an important
news release price respected levels at 1.3114 and 1.3143. But
sometimes, when momentum is very strong, these levels stop the price
only for a short period of time.

How to
find these levels

In Forex we do not
have a lot of technical information – just exact price at exact
time. That is all. So we have to handle only with this information.
We have to find zones of interest analyzing how price reacted at
particular price. Zones of interest are the zones where price

  • bounced,

  • broke very

  • spend more time
    than in other, near price zones.

Historical chart has to be analyzed in a different time frames. Every level that is assumed as zone of interest has to be checked in history at least for a few months or even one year. 

I will explain how I found price action
level at 1.3070-73. I defined only a 3 pip gap, but usually it is
very hard to pinpoint exactly – error always happens. 
Below is 1 hour chart of fast bounce from
1.3070-73 level.

And how the same action looks at 1 minute chart:

The same 1.3070-73 level, but action, where it was
broken very fast is in a below 1 minute chart. Price broke the level
without stopping, but returned and bounced.

And third action that we need to look for is price ranging around the level. This we can see in a chart below.

And to prove that this level is a good one, I post
a chart below with some old – 2010 December price action. I think
chart tells enough.

I believe that from these examples it should be
clear how to find price action levels. It need just some experience
and everyone can easily find these levels. There's no strict rules,
but charts tells a lot.

How to trade these levels

These levels can be traded in many different ways.
Different indicators can be used to determine when price is going to
bounce or break. It doesn't matter what methodologies a trader uses,
matters just one thing – to try to guess how price will react at a level.

I do not use any indicators in my trading – just
price action. So there I suggest one method for trading the levels,
which I will describe. But everyone has to keep in mind that trading
levels is not limited to just this method. I am trading levels in
many different ways.

One of the best win ratio is trading levels after
a break. This means – we wait for a level break and when price
comes back to it we trade with trend dirrection.

Example of this trade with all explanations in a 5 minute chart is below.

Setup can be described like this:
1. We wait for a level break. Break should be clear, price at least at 5 minutes chart should stay below that level, 3 - 5 candles are ok.
2. After a break, we wait for price to come back to that level. Some can short the same time price reaches the level, some can wait for a confirmation - candle patterns.
3. We setup up stops - loss 10-15 pips from our level, take profit also approximately 10 pips. But if we see very strong momentum to our direction, we can use up to 20 pips take profit stop.
4. Best odds are the first time price comes back to a level. Second time is also good, but never trade third time! 
5. If price doesn't reach take profit and for the third time it comes back to the level - consider closing at break even.

Important end note

These are the simple rules for trading levels. But it would be best if everyone would make their own rules, that fits best their competences, qualities and needs. This is very important in trading in general.

Translate to English Show original