My manual trading system is 70% based on price levels. I think that most traders use some kind of levels – pivot points, Fibonacci retracements, trendlines, price action levels, etc. Of-course there are profitable traders, who do not use any kind of levels. But in my opinion levels do increase odds to be profitable. So in this article I will write about different price levels. I will try to give basic understanding about levels and how do I classify them.
Methods of finding price levels
1. Every trader is aware of Fibonacci retracements. There is a GBPUSD 1 hour chart with Fibonacci retracements in an image below . As seen in the image some levels are respected, some not. Basically Fibonacci is nothing special or magic – it's just a tool to devide recent price move into percents. And according to Fibonacci some numbers are important in our universe. It's 0.236 (23.6%), 0.382 (38.2%), 0.5 (50%), 0.618 (61.8%) and so on. I would suggest adding 1.236 and 1.5 – this would add some more levels to watch. My observations show that these levels are respected often enough.
2. Pivot points. The name tells a lot – pivotal. This means, that pivot points are levels, where price is moving around. Most common calculation formula is:
P = (H + L + C) / 3,
where P – pivot point, H – high, L – low, C – close. Most often values are used from previous session. After finding out the pivot level, supports and resistances can be calculated. “..these levels may simply be calculated by subtracting the previous low (L) and high (H) price, respectively, from twice the pivot point value” - Wikipedia. I am very sceptical about these points, because they are not flexible and can be applied in too many different ways.
3. Trendlines. I call it any straight line on a chart (image below). It can be a channel, can be combined with Fibonacci, etc. These, straight, but usually not horizontal lines show the dirrection of price movement. If we would have a perfect trend, then trendlines would be respected all the time. These lines are useful in trading, but in my opinion cannot be used alone – should be combined with other levels, price action or indicators.
4. Dynamic levels. I call it levels, that are calculated according to some mathematical methodology. It can be programmed into indicators and are recalculated at every pip or candle close. For example - parabolic regression. There are some good suply/demand indicators. So suply and demand zones can be used as levels. There's a lot of different indicators.
5. Price action levels. These levels are found according to price action. Price action shows historically significant levels. It means, we have to find levels which were respected by a price. It is most probable, that in such significant levels market players have interest. For example it is probable that an institution wants to buy currency at fixed level (or area). As we know it is not possible to fill huge amount of orders at the same price. So they might be filling orders whether the price comes back to a predefined area. And this also might explain magnet levels. This is just my logical explanation, not necessarily it is true.
There's some historical price action levels in a chart below.
I have found these levels analyzing 2 years of price data. And as it is seen from a chart these levels are still respected. I will write only about price action levels in one of my next articles.
Types of price levels
I calssify levels like this:
1. Supports and resistances. Support is a level which is below current price and it is probable, that price will stop and/or reverse at this level. Resistance is the same as support, just it is above current price. In a chart below I have ploted resistance and support.
If we find good levels almost always we will notice that price respects them. The biggest problem is to know how and in how many pips it will be respected.
2. Magnet levels. These kind of levels are not used by many traders, but I find this kind of approach useful. Magnet levels are price areas, that attract price. And when price goes there it spends some time around, moving a lot (chart below).
It is important to know that any level can change it's type. For example support can become resistance or magnet.
Levels combined with other trading techniques can generate a very profitable strategy. Also odds are increased by trading confluence of different levels. The more different levels are at the same price area, the stronger that level is. In one of my next articles I will write about price action levels and how to trade it.