Forex for a trader
How to identify key price levels in forex

How to identify key price levels in forex3 Simple Ways to Identify Support and Resistance in Forex. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to Rob Pasche. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. Support and Resistance Talking Points: Support and Resistance can help guide traders with entries and exits.

New traders often make it more difficult than it really is to identify these levels. Learn how to use Psychological levels , Swing highslows, and Pivot Points. "Support and resistance" is common jargon for areas on the chart where price has a difficult time breaking through. Support levels tend to stop price from falling below a specific point and resistance levels act like a price ceiling that price cannot break above. Knowing where these levels are make it much easier to decide when to open and close trades , but how can we locate these prices to begin with? Today we will cover 3 simple ways to identify support and resistance in Forex. Psychological Levels. Often called "psych" levels, psychological levels occur when price ends with multiple 0's. It's human nature to gravitate towards round numbers when discussing any topic that involves numbers, Forex included. For example, when traders talk about what they think the Euro will be worth in the future, they probably won't give an answer of 1.4278 or 1.3044. They are much more likely to round off the price to something simpler, like 1.4300 or 1.3000. The same thing happens when Forex traders place their orders. We will often see clusters of orders around these whole numbers, which creates price levels that can affect how price behaves. That's exactly what we want for our support and resistance levels.

The most common psych levels involve price having two zeros at the end (not including the 110th of a pip ), such as 1.64 00 or 102. 00 . More powerful than that would be psych levels ending in three zeros, such as 1.3 000 or 12 0.00 . Leaving the most powerful psych levels of all, four zeros at the end, 1. 0000 or 1 00.00 . The chart below has four levels drawn at psychological levels. We can clearly see their effect on price action. Learn Forex: Psychological Levels. Another great way to find support and resistance levels is to mark levels in the past where price had a difficult time breaking through. As price moves up and down, each level that price has bounced off of could be a level in the future that price bounces off of again. This is a manually intensive method and takes time to draw on all the currency pairs that we trade, but can pay off in the long run. Learn Forex: Swing Highs & Lows Acting As Support & Resistance. As the EURUSD chart shows above, a level was drawn when price reached a new high or low (red circle). Later when price approached these levels again, they bounced off the same levels (white circles). The effect will not always be this clean, but it does occur fairly often. This is a method used quite often in Range Trading . We can buy at support with our stop loss below and we can sell at resistance with our stop loss above.

Arguably the easiest support and resistance levels to add to our charts, pivot points are a built-in indicator on many platforms that will automatically draw key levels without any effort on our part at all. Pivot points are created by the previous period's High, Low and Close prices, with the most common period size being the Daily period. We can use these levels just like any other potential support and resistance levels on our charts. Learn Forex: Pivot Points. Support and resistance doesn't have to be confusing. We can mix and match any of the methods above and create a healthy amount of price levels that we can trade. As always, practice makes perfect. So make sure to test out these methods yourself on a real time demo account. New to forex? Our Beginner Guides dive deeper into support and resistance showing how beneficial they can be to the Forex market. ---Written by Rob Pasche. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. 3 Keys for Identifying Breakouts. Verified Profitable Trader.

Breakouts are some of the tougher environments for traders, and understandably so because they represent potential, but often fail. I’ve already written an article for trading breakouts Post-Breakout , but what about the Pre-Breakout moments where you have to make that key decision to trade it or not? How do you identify them and what are the key elements that precede strong breakouts? This is the key point of this article – to give you 3 tips for identifying a soon to be strong breakout so you don’t get trapped in a false breakout. I will go over the three elements you will want to find before considering a breakout, then briefly highlight what is behind them from an order flow perspective. By learning to spot these breakout trading clues, you can position yourself to trade higher probability breakouts and capture a larger portion of the upcoming move. 1) Well Defined SupportResistance Level The first pre-requisite to identifying a healthy pre-breakout situation is having a clearly defined barrier in the form of a support or resistance level. The classic case is when you have a trend in place (lets say uptrend) and then the price action runs into resistance at a key level. Ideally, you want there to be at least two touches on this level before defining it. The more horizontal and neater this level is – the better. But it should be noted, this is just a pre-requisite and generally by itself not enough to identify a healthy breakout setup.

The reason for the two touches is to identify a sticking point where players are parked and what level they are defending that the (bulls in this case) are unable to penetrate. By finding both parties present, we have the environmental potential from an order flow perspective to create a healthy breakout. In this example, the sellers are clearly holding a price they want to defend and have stops just above it. By them staking their defense in a clear location, it communicates where their orders and stops are likely parked. It is tripping those stops, along with bringing in new buyers that is the goal of the bulls. Below is an example of a clearly defined resistance level after a downtrend and consolidation period, communicating there are bears clearly defending a level. Image 1.1. 2) Pre-Breakout Pressure or Tension (Squeeze) The second element you want present prior to a breakout is a pre-breakout pressure or tension that manifests as a squeeze . This pre-breakout tension is highly important because it creates a friction and pressure upon the defenders ( in this case the bears ). As the bears realize their rejections off a key level are getting smaller, while the bulls continue to gain more upside and territory, it causes a friction in their minds that forces them to make a critical decision ( either stay in and defend, or exit the market ). As the room gets smaller and smaller for them to work with as the bulls squeeze the bears out, sellers defending a level will often exit early, leaving the defense to those who are not realizing the game is up. This further weakens the defenses at these levels until very few are left to carry the burden. You can easily identify a price action squeeze and this pre-breakout pressure, or tension, by the price action forming higher lows in attacking a resistance level, or lower highs when attacking a support level. This is a combination of the current bulls willing to buy up the instrument at a worse price, along with new bulls wanting to get long before the breakout. A good example is presented in the same chart which I will zoom in on to highlight. Image 1.2. 3) 20EMA Carry Another key element you will find prior to breakouts is the 20ema begins to carry price leading up to the key resistance or support level that is being defended. This is not so much that traders are placing orders there prior to the breakout ( although many will ), but also a visual representation of how the squeeze is taking place.

Just looking at the chart above, we can see in the beginning, after the first rejection off the key resistance level, price penetrated nicely below the 20ema. But as we get closer and closer towards the right where the squeeze is taking place, you see the market barely go below it for more than a single candle before resurfacing. Also, you will notice how the first few times the rejection approaches the 20ema, it breaks through after one candle. But towards the end many candles start to float above it where some traders are entering in anticipation of the breakout. Another really good example was one I traded and blogged about ahead of time with the AUDUSD on the 1hr time frame. The pair had been trending up for 110 pips over two days, but ran into a key resistance level that it got stuck on at 1.0081 (image below). Image 1.3. Using the example above, notice how the 20ema in the middle of the chart is penetrated about 20pips, but then as we get closer and closer to the resistance level and the squeeze begins to happen, notice how the 20ema begins to carry the price action, and the penetrations get smaller and smaller? This is a combination of very few sellers defending the level, while the bulls in anticipation of a breakout ( realizing they have control ) are likely entering new positions to get in ahead of the upcoming breakout ( I was one such trader ). Eventually the pre-breakout pressure and tension became too intense and the bears gave up when the bulls made their push, tripping stops and creating a large breakout bar with a strong close. In Conclusion Identifying breakouts can offer highly profitable opportunities when you can position yourself well. But to do this, you must be able to identify highly probable breakouts with these 3 key elements which are; 1) Well Defined SupportResistance Level 2) Pre-Breakout PressureTension (Squeeze) 3) 20EMA Carry.

If you can learn to spot these key elements prior to a breakout, along with reading various other price action clues, you will find yourself entering in higher probability breakouts, increasing your success and profitability. You will also find yourself not getting trapped by false breakouts which can wreak havoc on your account and confidence in trading them. Thus it is critical to read and identify the key elements prior to a breakout. For more info on how to trade price action, along with lifetime membership, getting access to the traders forum & more, make sure to visit my price action course page. How to “Fine Tune” Your Key Levels. You probably know by now that the use of key levels in the market is a large part of what makes a Forex trader successful. But how can you be sure that the placement of a level is as accurate as it can be? Should the level be placed at the highs or lows of each candlestick or at the body? The answer to these questions is of course, dependent on current market conditions. In some cases, it may make sense to place the level at the highs or lows, whereas in other cases it may be more logical to place the level closer to the body of the candles. And of course, there will be times when a level deserves to be placed at both the highs or lows as well as the candlestick body. It’s easy to know the answer when the highs or lows all match up perfectly across a given level, but that’s a rare occurrence. Which brings us to the million dollar question… How can you be sure that the placement of a key level is ideal when the highs or lows don’t match up perfectly?

That’s exactly what we’re going to uncover in this lesson – a way to use the lower time frames to “fine tune”, or refine, the placement of key levels. So without further ado, let’s get started. It's All About the Time Frames. First things first, before we talk about the ideal position for a level, we first need to understand the relationship between key levels and time frames. You may have noticed that levels don’t always play nice across multiple time frames. For example, a level may look great on a daily chart, but a four-hour chart reveals the candlestick body breaking support or resistance. Let’s take a look at an example. Notice how this level is being respected nicely on the daily time frame. All the candlestick bodies within the highlighted areas are contained above or below the key level with no overlap. Now let’s take a look at the same level on a four-hour chart.

The four-hour chart above shows the first retest of this key level as new support. Notice how the body of the candlestick closed below the level. At first glance, this looks like a failure of support that may lead to a breakdown in the market. But it doesn’t. Why? Because “the market” is only interested in supporting this level on a daily basis, not a four-hour basis. Here is a comparison of the two time frames, side-by-side. The level represents the same price in both charts. We can draw two conclusions from the comparison above. The level is, in fact, being respected as new support The level is being respected on a daily basis. The fact that all lower time frames made false breaks tells us that the market is only interested in supporting this level on a daily basis. This means that moving forward, we should trade this level from nothing lower than the daily time frame. This may seem like a simplistic example or even obvious, but it’s extremely important to understand the significance that time frames play when identifying (and trading from) key levels. Now that we’ve covered the basics, let’s discuss how to use the lower time frames to refine the placement of key levels which we can then trade on the higher time frames. Don't Dismiss the One-Hour Chart.

Although we do all of our trading from the four hour and daily time frames, that doesn’t mean we have to dismiss the one hour chart. It can be a nice compliment to the higher time frames if used properly. I’m not advocating the use of the one hour chart to enter or exit trades, simply to be used as a tool to help refine the placement of key levels that have been identified on the higher time frames. I also want to point out the fact that this “trick” won’t always work, but when it does it can be extremely helpful. We’ll cover the criteria needed for it to work later in the lesson. For now, let’s focus on how it works. We’ll start by defining a channel that formed on the AUDUSD four-hour chart. The chart above shows a simple equidistant channel that formed on the AUDUSD four hour time frame. This type of pattern is fairly easy to spot, but how can we be absolutely sure that our levels are accurate? For instance, who’s to say the channel shouldn’t be drawn as follows? Notice in the chart above, channel support is drawn a bit lower to include the lows of the first two touches.

For comparison purposes, here is a close-up of the two variations. The comparison above highlights how the first support area captures each swing low, whereas the second support level does not. The second support level was also drawn using the extreme lows of the first two touches. So how can we determine which placement is most appropriate for this pattern? To find the answer, we need to move down to the one hour time frame. By using a lower time frame such as the one hour, we can use price action to fine tune our key levels. Let’s take a look at how this channel appears on a one hour chart. The AUDUSD one hour chart above shows a bullish pin bar which formed at support. It should be noted that the placement of this level is the exact same as Channel Support Placement #1 in the four hour chart above. So what is this bullish pin bar telling us? It’s telling us that this level is the “line in the sand” between the bulls and bears. Remember that pin bars are in indication of increased supply or demand at a particular level. So the fact that the bulls were holding this exact level tells us that this placement (#1) is the most appropriate for this pattern.

At this point you may be wondering how the rest of this channel looks on the one hour chart. And that’s a perfectly legitimate inquiry. In fact, the only way this “trick” works is if the entire level lines up with the one hour chart. Let’s take a look. Notice how each touch off of support lines up nicely on the one hour chart. This gives us further confidence that the bullish pin bar is a valid indication that our support level has been placed correctly. If any of the bodies of the circled candlesticks above had broken channel support, we wouldn’t be able to use this technique. But the bullish pin bar failed, so what’s the point of this exercise you ask? Remember, we aren’t trying to identify a price action signal to go long or short within the channel. We’re simply using the one hour chart to help fine tune the placement of the levels that define the channel. This makes trading a breakout on the four-hour time frame much more accurate and dependable.

Which brings me to an important point. Just because we use the one hour chart to fine tune a level doesn’t mean we want to trade this pattern from the one-hour time frame. Again, we’re simply using the lower time frame to get a more precise level which we can then use to trade the higher time frames. Putting It All Together. So now that we have our levels in place, we’re ready to trade a breakout from the four-hour chart. Remember that we want to do all of our trading from the higher time frames (four hour and daily). So although we used the one-hour time frame in this lesson to define our level, we’re still entering and exiting the market from the four-hour time frame. Here’s how this channel breakout could have been traded. You’ll notice that the four-hour close pointed out in the chart above would have broken support regardless of where the key level had been drawn. But remember that this is the line in the sand between the bulls and bears. Which means it isn’t only useful as an entry signal but can also be used as an exit strategy in the event the trade goes against you. This means that you now have an accurate level to use as a sentiment indicator. For instance, if the market were to close back above the level after breaking to the downside, you would want to close any short positions as it would be a clear indication that the bulls aren’t ready to go home yet. Although key levels should always be thought of as zones rather than exact levels, knowing the most appropriate placement of a level will make you that much more accurate as a trader.

I hope this lesson has introduced an easy way for you to fine tune your key levels. Do keep in mind that most levels are best thought of as zones rather than exact levels. So although the technique we just discussed can be highly effective, it won’t work in every situation nor is it without flaw. So remember to always protect your trading capital with a strong defensive strategy. In closing, here are some of the most important points from the lesson. Key levels act as support and resistance and are often better thought of as “zones” rather than exact levels It’s rare for a key level to line up perfectly with the highs or lows of a series of candlesticks Not every time frame will respect a key level – it’s your job to identify the time frame(s) that work best with a given level Bullish or bearish price action on the one hour chart can help you fine tune, or refine, the placement of key levels This “trick” to using the one hour chart only works if the entire level lines up with the one-hour time frame Although we can use the one-hour time frame to help refine the placement of a key level, we should still trade from the higher time frames. What do you think about the technique we just discussed to fine tune key levels? Do you currently use something similar? If not, do you see yourself using this one hour technique going forward? Share your question or comment below. good jobs Justin, very helpfull for me, thanks.

You’re very welcome my friend. I’m glad you found the lesson helpful. Thanks Justin I always thought key levels as exact precise levels rather than areas or zones, indeed you have enlightened me. have had a very good understanding based on this analysis. Thanks for a simple notation. Thanks for sharing importance of pin bar along with supply and demand zone. Well I was looking for dozi too. Nice job ?? Disclaimer: Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by Daily Price Action, its employees, directors or fellow members. Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to BuySell futures, spot forex, cfd's, options or other financial products. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. High Risk Warning: Forex, Futures, and Options trading has large potential rewards, but also large potential risks.

The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, and options and be willing to accept them in order to trade in these markets. Forex trading involves substantial risk of loss and is not suitable for all investors. Please do not trade with borrowed money or money you cannot afford to lose. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results. Copyright 2018 by Daily Price Action, LLC. Please log in again. The login page will open in a new window. After logging in you can close it and return to this page. How To Trade Key Chart Levels in Forex. Today’s Forex trading lesson contains trading strategies that you can put to use immediately in the markets.

We are going to discuss how to trade price action from key levels in the Forex market. Key levels occur in a variety of market scenarios, and we can combine these key market levels with simple price action strategies to obtain a high-probability trading strategy. Key market levels are the core foundation of all technical analysis and price action trading. By focusing on the raw price dynamics and key levels in a market, we can remove the clutter and confusion that so many trading systems and strategies are full of, and instead trade from a clear and objective mindset. I cover all the concepts discussed in today’s article in greater detail in my trading course, as well as a plethora of other simple yet highly effective trading strategies. Note: All charts in this lesson reflect the daily time frame. Trading from support and resistance in trending markets. Trading with the dominant daily trend is the primary technique I use to trade the markets. Much of my course is dedicated to trend analysis and teaching traders to trade simple price action strategies in the context of a trending market. We can look for price action signals forming near levels of support and resistance that develop as a result of the natural ebb and flow of a trending market. In the example chart below we have the daily GBPUSD showing about the last 4 months of data. What I have done here is simply drawn in the obvious key support and resistance levels and then highlighted the valid price action trade setups that formed near these levels. No magic or “robots” here, just simple common-sense trading using the natural dynamics and levels in the market: Trading from support and resistance in range-bound markets.

Unfortunately, the market is not always trending, in fact it’s often said that markets spend more time consolidating and moving sideways than they do in trending conditions. Fortunately, with knowledge of how to trade simple price action setups from key levels, we can effectively trade range-bound markets as well. In the example chart below we see the daily EURUSD from about the end of May to mid September of this year. We can see an obvious trading range that developed in this period of time and some price action setups that formed off the support of the range. Note that just before the trading range finally broke out lower, a long-tailed pin bar formed that showed rejection of the interior of the range, once the low of this pin bar broke we saw a significant move lower. Trading ranges can be a bit erratic but if you watch the boundaries of them closely you will often see some solid price action signals form at the key support or resistance of the range. Trading from swing points in trending markets. As a market makes new highs or lows it forms what I call “swing points” in the market, these are very important levels to watch because they essentially create new support or resistance. As such, a swing point does not need to be “confirmed” by multiple rejections of price in order to be considered a valid support or resistance level, rather the actual swing in the opposite direction itself creates a new level of support or resistance. When we see price approaching a recent swing point we can be on alert for price action setups forming near it. A recent swing high will often act as support in an uptrend, and a recent swing low will often work as resistance in a downtrend. Let’s look at a chart to see this more clearly. In the example chart below we see the daily EURUSD from about mid-August until now. We can see that price came down and found support near 1.3600 in mid-September. This swing point then became very important for the subsequent price action forming near it, acting both as support and resistance.

Trading from dynamic EMA support and resistance in trending markets. I use exponential moving averages (EMAs) on the daily charts to help with trend analysis and identification of dynamic support and resistance levels. For today’s lesson I am going to discuss how I use the daily 8 and 21 EMAs to highlight key levels in the market to trade price action from. In the example chart below we have the daily EURUSD showing about the last 4 months of data. I have applied the daily 8 and 21 period EMA’s (applied to close) and then I simply watch for price action setups forming at the EMA levels or in between them, in the EMA “layer”, when the market is trending. When the EMA’s are crossed lower and diverging, we have downward momentum, and when they are crossed higher and diverging we have positive momentum. By simply looking for price action setups forming on the EMA levels or within their support or resistance layer, we can easily identify high-probability key levels to trade from. Trading from event-area support and resistance levels. An event-area is a price level or zone that saw a price action signal form and then a large directional move or “event” occurs. These levels are obviously very significant and I discuss different ways to trade them in my price action trading course. But, for today’s lesson I am going to show you how to trade price action setups from event areas. In the example chart below we have the daily XAUUSD (spot gold) chart showing about the last 4 months of data. We can see a good example here of an obvious event-area that formed through $1700.00 as price rejected this level multiple times forming well-defined pin bar strategies that subsequently set off significant directional moves.

When you see an obvious price action signal that sets off a large move, you can then watch the level the price action signal formed at for future entries if price approaches it again, as these levels are obviously quite significant. As you can see from the examples above, trading does not have to be complicated; you can learn to analyze the market and trade effectively by simply gaining knowledge of how to identify key market levels and price action setups. When we combine these two components we get a very high-probability and simple trading strategy that is also flexible enough to be applied to the ever-changing conditions we see in the Forex market each week. We cover all the key market levels in the major Forex pairs in our daily members’ commentary each day. These ‘key levels’ are essentially the foundation to what I teach my students in my Forex trading course and members’ materials. I believe price action trade setups have a much higher probability of working out in our favor when we look for them at these confluent key levels in the market. 3 Powerful Techniques to Determine Trend Strength. Every trader wants to know how to identify trends and determine their relative strength. It’s what allows us to trade with momentum rather than against it, which in turn increases the odds of a favorable outcome. Unfortunately, gauging the strength of a trend isn’t as straightforward a task as some would hope. Let me rephrase that, the plethora of indicators and techniques that have flooded the financial world over the years have unnecessarily convoluted a relatively simple task.

Yes, it is a simple task. Is it easy? Well, that depends on the techniques and tools you decide to use. There are three very simple techniques that I will show you today that, with enough practice, will make determining trend strength a much more manageable task. By the time you finish reading this lesson, you will have a firm understanding of trend characteristics as well as when to know whether to look for a continuation of the current trend or an imminent breakdown. Let’s get started! Characteristics of a Trending Market. First and foremost, we need to know how to identify a trending market. Traders have complicated the topic for years, but it’s very simple, I promise. A trending market is one that is making higher highs followed by higher lows or lower lows followed by lower highs. If we transform that statement into its visual equivalent, we get the following illustration. Pretty basic stuff, right? But before you leave thinking you know about the concept of higher highs, higher lows, etc., there are some concepts later in the lesson that may not be familiar to you. In fact, I would bet that 90% of Forex traders don’t know to look for what I’m about to show you . In other words, you may want to stick around. Now comes the fun part – taking this very basic concept of highs and lows and turning it into actionable information.

For that, we turn to the most basic principle of technical analysis. 1. The Highs and Lows Tell the (Whole) Story. Let’s start things off by just visualizing where the highs and lows on a chart have formed over a period. In short, the relationship among highs and lows as they form over time. All we are doing with this technique is observing where the extended swing highs and lows are within a given trend. The GBPUSD daily chart below is a perfect example of how something as simple as watching how the highs and lows of a market interact with each other can signal a change in trend. Notice how over the course of several months, GBPUSD carved out somewhat of a rounding top, which is a valid technical pattern. However, for purposes of this lesson, we’re only interested in using the swing highs and lows to identify a possible change in trend. In the chart above, the first lower high was the first sign that the uptrend was beginning to fatigue. But it wasn’t until the first lower low that we had a telling indication that the current trend had reversed. Keep in mind that trend changes won’t always be this obvious. But the signs are always there; you may just have to look a bit harder to find them in some instances. At this point you may be thinking, this is great and all, but howwhere do we enter short? For that, we need the highs and lows to interact with a key level in a way that offers a favorable setup. In other words, we need to turn the price action you see in the chart above into actionable information.

2. Distance Between Subsequent Retests: A Killer Way to Determine Trend Strength. Now that we have discussed how to use swing highs and lows to gauge the strength of a trend, let’s add a key level into the mix. There is a common (and costly) misconception among traders in all markets where technical analysis is a traditional method of trading. Someone at some point in time came up with the notion that support and resistance levels become stronger with each additional retest. I hate to be the bearer of bad news, but that’s a complete and utter fallacy. Multiple retests of the same level make that level more visible, they do not make it stronger. And visible and strong are by no means synonymous. Think about it, if this were true – that a level became stronger with each additional retest – it would theoretically never break. Because if it didn’t break on the third retest, why would it break on the sixth when it’s supposedly twice as strong? It doesn’t add up. So if we can agree that multiple retests of a given level do not make it stronger, we can naturally conclude that it makes the level weaker, right?

Well, not quite. While a market that continually revisits the same area can eventually break through, we don’t have enough data to conclude that it is likely . For that, we turn to (you guessed it), highs and lows. More specifically, the relationship the highs and lows have with our key level. The illustration below shows a trending market that is respecting a trend line, however, the distance between each retest has become shorter over time. Note how the market tested this level as support on four separate occasions since its inception. What many traders tend to dismiss, however, is the shorter time span between each retest as the trend extended higher. The likely outcome for this type of price action is as follows: Why does this happen? In short, it’s the market telling you that demand is drying up. When it comes to supply and demand, as prices move higher, demand naturally begins to run thin as traders a less willing to buy at higher prices.

At the same time, supply increases as market participants unwind their positions to book profits. In the case of the illustrations above, that demand is drying up more quickly with each subsequent rally from trend line support. Thus, we get a market that begins spending more time trying to keep its head above water than making higher highs. Of course, this concept also applies to a bearish trend where demand increases and supply decreases as prices drop. The EURUSD daily chart below is a perfect real-world example of a currency pair that began testing support more rapidly over the course of 256 days. Notice how each rally spent less time away from support as the trend became extended. We all know what happened next. The breakdown you see in the chart above was the starting point of the massive 3,300-pip drop that transpired over the next 44 weeks. If we want to get fancy, we can combine the two techniques we just discussed to further the conviction that a breakdown was imminent. I will be the first to admit that the pair was not making lower highs before the technical break. However, the fact that a rising wedge formed indicates that each subsequent rally had less bullish conviction than the last.

3. Clustering Price Action: An Early Warning Sign. Last but not least is when price action clusters near a key level. In some ways, this is a combination of the two techniques we just discussed. I often call this “heavy” price action. The idea of heavy price action is something my members have become very familiar with over the years. As the term implies, this is when a market begins to put constant pressure on a key level over a short period. I suppose I should come up with a better word for it since the word heavy only applies to a pair that is putting pressure on a support level. That would make the opposite “light” price action, which doesn’t have the same ring to it. (I’ll save that for a later discussion with my members.) At any rate, the idea here is to watch how the market responds to support or resistance within a given period. A typical period would be a few days or maybe a full week if trading from the daily time frame. If the market begins to cluster or group for an extended period at a key level, chances are the trend is about to break down and reverse.

The illustration below shows what this looks like for a market that is in an uptrend. Notice how, toward the latter half of the trend above, the market began to cluster just above support. This type of price action leads to a breakdown more times than not. The AUDJPY weekly chart below is a perfect example. I can’t tell you how many times I’ve seen this happen at significant support levels. Unfortunately, those who haven’t done their homework find themselves entering in the direction of the trend just before it breaks down. But don’t be fooled into thinking this technique is only useful on the weekly chart. It can, in fact, be extremely powerful on just about any time frame, even the 1-hour chart. The annotated chart above is the same one I posted inside the member’s area on November 19, 2014. Once again, notice how the price action became heavy toward the latter half of this ascending channel, a clear indication that the bullish momentum was not only tiring but that a break was imminent.

The AUDUSD 4-hour chart below paints a fairly bleak picture of what happened next. The result of the breakdown in the chart above was a 680 loss over the next 30 trading days. While it’s still necessary to wait for a close above or below a key level before considering an entry, understanding how clustering price action can lead to a break will help you avoid being on the wrong side of a trending market. Determining the strength of a trend doesn’t need to be a complex operation. Something as simple as the three techniques discussed above are all you need to gauge whether a trend is likely to continue or break down. Keep in mind that all three techniques above are as useful in bearish markets as they are in bullish markets. The charts and patterns above were only used to maintain a consistent theme throughout the lesson, but the techniques discussed above can be utilized in any market and on any time frame. The best thing any trader can do for themselves whether they are attempting to decipher trend strength or identify key levels is to get back to basics. Every market has its story to tell, and every story can be translated using swing highs and lows. As I often say, your job as a trader is not to know what will happen next. Rather, your job is to gather the clues the market leaves behind and assemble them in a way that stacks the odds in your favor; and every possible clue is born from the natural ebb and flow of the market.

How do you currently determine the strength of a trending market? Will you be adding any of the three techniques above to your trading arsenal? Share your opinion, leave some feedback or ask a question below and I’ll be sure to get back to you. Hi, Thanks for this lesson . the problem in detecting market direction is not as simple as drawing some channels and seeing the bounces. for example on gbpusd in recent days. there was a decending channel. but it broke out of channel for 2 days. then it came back inside the channel. ( maybe a false breakout ) but again before reaching the bottom of that channel it turned direction. so on the very last candle that u want to enter a trade u won’t know what will happen.

seeing higher highs and lower lows on passed candles does not act perfectly on the upcoming candles. for example I place a sell on gbpusd it goes higher. I close that and place a buy , and it drops ! some how the market or broker apps are designed intelligently to hit our stops then rotate! Farzin, you’re welcome. And you’re right; there is no perfect way of identifying trend strength. Then again, “perfect” doesn’t exist in the world of trading. The best we can do is use the price action on our charts to determine the most likely outcome. As for GBPUSD, the pair has been range-bound since January. The techniques described in this lesson are to be used to ascertain the strength of a trending market; they won’t be of much help if a market is stuck in a range. Lately, the intra-day trading is more into vogue because it doesn’t add swaps to your positions and particularly keeps away the overnight risks. The major benefit of Intra-day Forex trading is - a trader can make the potential trades in the news hours, keeping up with the liquidity in his account and can have extra competent check on trades. Therefore, more of the expert traders are inclined towards intra-day trading.

The technical analyst’s studies on-line Forex charts and uses the past market action to achieve their foremost goal - forecast a price or trend movement. To predict the drift and the movement of the currencies most of the traders make analysis on the Forex chart. I am Trader since 2014 and I believe Trend Following Chart Patterns like Triangles, Pennants, Flags, Rectangle. Also Trend Reversal Patterns Like Doji, Hammer, Shooting Star, Head & Shoulders… Terry, I believe there will always be those who prefer intraday charts over the higher time frames and vice versa. It’s a hugely personal decision and one that usually takes years to form. Thanks for sharing. Been on here for almost 3 hours, reading price action techniques and even links in between each post. Really insightful Justin, thanks. Sam, you’re welcome. Let me know if I can be of any further help. Cheers. Nice one and very explanatory, I used the clustering P. A to catch a big move on (USDCHF, M30) and it was good.

I hope i could share a pic on here. Nice! Once you know what to look for it becomes relatively straightforward. Thanks for stopping by. i like the simplicity of your explanation, i have learnt something from these thanks am a new biz i will also like to received lots of training from u can u help me out ? Eddie-umoh, glad I could be of help. You can learn more about my Forex course and community here dailypriceaction. comforex-price-action-course. Thanks for the lesson. On The GBPUSD chart above circle #7 forms the first lower low but it seems it was overlooked and instead circle #9 was apparently cherry picked as the first lower low. Likewise there were a series of lower highs forming a cluster between circles #7 and #8, yet #8 was labelled as the first lower high. I am not familiar with this method of selecting highs and lows. Can you expound further?

Norm, I’m not sure what you’re referring to. I chose the most obvious swing highs and lows in the charts above. Like everything else, there’s some interpretation involved, but I certainly didn’t cherry pick anything for purposes of this lesson. Cheers. very informative, thanks but i, m a bit struggling on to identify the levels in a correct manner. Dear Master, Couldn’t resist myself to stop posting this comment. It’s simply great. I’m 3 months old with trading … would say I just started, hoping to see you soon. I am most great-full for these secretes revealed. I have been struggling with my trades in the past years and months with no understanding of the market. but, after reading through your lessons, its like a vile is taken off my eyes. i can now read the charts and understand its direction. God bless you abundantly. Excellent article.

I now see something forming possibly like this on Gbpusd. I’m going to save this page and keep reading it. Thank you. Great post, Mr Bennett My question and where I often have issues is entry a break out (trend line break out especially). There are some cases where a break out and it doesn’t retest My question is would you consider it as wise to enter a trade immediately after the break or wait for a retest and what do I do if it doesn’t retest the break out area. Thank you. A great asset to all traders. You are too much. Thanks a lot. Please, keep it up. I think I can’t fail again as I used to. So, my questions now are: (1) After i execute such a trade, clustering can also be used to determine when to leave the trade. (2) Allowing such a long trade, can’t fundermental (high impact news) chang the trend? So Justin can i use daily for direction and 4 hour for entries and yes u said u like pin bar and engulfing so when u enter at break of each? TIA. Thank you Justin ?????? Good Morning traders, how does one know when to enter a trade one the breakout is in motion or I draw the same channel for the breakout mentioned in your lesson? Thanks for giving us such valuable lesson. Great. i am going to practise it right away. thanks.

Well explained and clearly shown.. I loved it!! I will make this my first strategy for trading a trend. Many thanks. somehow this makes very much sense. how can we know more about trend trading with you? I would like to know more from you. how many candles should you cover in the time frames to get enough info to draw trend lines. I request to know how to use Fibonacci. Brilliant simple explanation…will def help me to be more observative. Thanks for sharing this. This is great. It has widened my knowledge of entering a trade.

God bless you for this exposition. This is great. It has widened my knowledge of entering a trade. God bless you for this exposition. Hello Justin, thanks for this. its just fantastic. never thought of the chart in this way, you are very correct. thank alot. God bless. Wooow this is so amazing.

I have used this information together with the knowledge I am getting from another site. I am happy my trading has improved. Thank you for the great article. Wow what a great information for a beginner trader. It is so handson. The clustering techniques I have already read in Bob Volman’ book. First one is the basic and classic technical analysis technique which is very very useful. The second technique which I have learned for the first time and really excited about it. I would like to use all these three technique in my trading. I have also bought two of your books from Amazon but not yet started reading I will start those soon now. Thanks a lot. Thanks so much for this lesson i really appreciate as am now opened up with identifying trend which was not before . i envy you. thanks. Have lost so much money in the FX market. Now I see how I have been fooled for years.

You are an asset to humanity. Would appreciate your mentoring me. Thanks a lot, and please keep up the good work. Nice and thoughtful especially in the area of support and resistance retests. Really true and eye opening..thanks. Wish to receive mails from you. You always make it easy to understand. I always enjoy your posts. Thanks Justin. Still going thru the 6 steps of swing trading. Disclaimer: Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by Daily Price Action, its employees, directors or fellow members.

Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to BuySell futures, spot forex, cfd's, options or other financial products. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. High Risk Warning: Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, and options and be willing to accept them in order to trade in these markets. Forex trading involves substantial risk of loss and is not suitable for all investors. Please do not trade with borrowed money or money you cannot afford to lose. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice.

We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results. Copyright 2018 by Daily Price Action, LLC. Please log in again. The login page will open in a new window. After logging in you can close it and return to this page. How To Draw Support and Resistance Levels Like A Professional. In my daily Forex commentary each day, I draw in the key levels of support and resistance that I feel are the most significant in the current market environment. It’s something that I’ve done for so long it really only takes me a few minutes to do now, it really is a very logical and simple task for me and it can be for you too. Many traders make the process of drawing support and resistance levels a lot more difficult than it needs to be. After you have a general idea of how I draw my support and resistance levels, you should have no problem using that knowledge as a guideline to draw the levels yourself. We get tons of emails each week from traders asking how to properly draw support and resistance levels on their charts. Also, we get emails with chart attachments from traders who are clearly drawing far too many levels on the charts, thus complicating the process of price action trading and confusing themselves as well. Today’s lesson is going to be a tutorial of how I draw my levels in the market. Basically, I’m going to take you guys on a ride through my brain (scary I know) as I decide where to draw support and resistance levels on some real-time daily charts.

You can use this lesson as a reference until you feel comfortable enough drawing the levels on your own. Also, it will help you to make your own commentary each day of your favorite markets; writing down your analysis rather than keeping it all in your head is a good way to stay on track and make sure you have a clear plan for the week and day ahead. To get started, let’s clear up a few common myths about drawing support and resistance levels… Common myths about drawing support and resistance levels: Myth 1: You should draw every level you can find on your charts – Many traders fall into this trap, they end up taking an hour to draw on every little level they can find. What they end up with is a really messy chart that basically does more harm than good. You need to learn to draw only the significant levels on your charts, then you’ll have a useful framework to work from. Myth 2: Your SR (support and resistance) levels should always be drawn across the exact highs or lows of price bars – This is perhaps the biggest myth that traders have about drawing levels on their charts. Often times, support and resistance are more “zones” than exact “levels”, sometimes you will have a key level that is indeed an exact level, but more often than not we are going to be drawing our support and resistance lines midway through bar tails or even through the body of a bar sometimes. Point being, you don’t always have to draw the level exactly through the high or low of the bar. Note: if you are totally new and confused by some of the lingo here, please take some time to go over this candlestick tutorial before moving on. Myth 3: You should go back really far in time with your levels – Unless you are a long-term buy-and-hold investor right now, you don’t need to go back more than about 8 months when drawing your levels. If you look at our free forex commentary you can see we really only focus on the last 3 to 6 months when drawing in the daily levels, and that goes for my own personal trading too. I am not sitting there trying to draw in levels from the last 5 years like some traders…you are wasting your time if you’re doing this. OK! Now that we’ve cleared up those common myths about drawing SR levels on your charts, let’s move on to some “meat”: How I draw support and resistance levels on my charts: Below are examples of how I would draw the relevant support and resistance levels on some of the major Forex pairs, Gold, Crude Oil and Dow Futures as they stand at the time of this writing. Above each chart is a brief explanation of why I drew the levels where I did. Example 1: EURUSD DAILY CHART. Here we are looking at the current euro dollar daily chart. You’ll note the red lines highlight the longer-term or “key” levels and the blue lines highlight the shorter-term or “near-term” levels.

This is how all the examples will be in this lesson and hopefully it will make it easier for you to differentiate between what I often refer to as “key” levels from shorter-term levels that aren’t quite as significant. In this example, you can see this market is clearly in a trading range right now between about 1.3140-70 resistance and 1.2830 support. Those are what I would call the “key levels” on this current daily EURUSD chart. Within the range, we have some shorter-term levels that are still significant albeit less so than the key levels just discussed. Of special note are the two shorter-term resistance levels marked on the chart below. You will see that the one near 1.3070 is hitting a bar high from October 5 th , but also it’s going through the bodies and middle of the tails of the bars from October 17 th – 23 rd . This brings up a good point…a support or resistance level can be significant even if it isn’t exactly touching bar highs and lows. This is also seen at the key resistance of the range, note how the line through 1.3140 is not touching the exact highs on September 14 th and 17 th at 1.3171…this brings up the point that sometimes support or resistance is more of a “zone” than a strict exact level. In this case the resistance of the current range is really a small zone of resistance from 1.3140 to about 1.3171 (more on support resistance “zones” soon). Also of note, there was an inside bar on October 18 th , and after the market broke down from that inside bar it tried to rotate back up to about where it broke down at, and this breakdown level acted as resistance and held the market off from advancing further, and then as we can see the market has since fallen away from that level. These are some of the more subtle things you need to learn about when drawing in your levels…

especially shorter-term levels; that inside bar breakdown point held as a resistance, and often inside bar breakout points will act as support or resistance, even if it’s just for the short-term. Example 2: GBPUSD DAILY CHART. Here’s a good exercise for you to work on: When marking support and resistance levels on your charts, mark the longer-term “key” levels first and then draw the shorter-term levels. This will work to give you a framework for the current market conditions and gives your analysis some routine as well. One of the things I often write about is support or resistance “zones”, as often a support or resistance is not really an exact level but more of a zone. In the example below, we can see a very good example of a resistance zone that occurs between about 1.6270 and 1.6310. “Key” support or resistance levels are generally levels that price rejected forcefully and that gave rise to a significant move up or down, or they can be levels that have contained or supported price many times. Whereas, shorter-term levels give rise to smaller movements and tend to break easier. We can see good examples of both in the GBPUSD daily chart below: Example 3: AUDUSD DAILY CHART. In this example we are looking at the AUDUSD daily chart and we can see currently the market is in a large trading range between about 1.0612 and 1.0175. We classify 1.0612 as “key resistance” since it has caused significant turning points in the market and held on the last two tests. Similarly, 1.0175 is “key support” because it has led to significant turning points in the market and held on about the last 4 tests. The shorter-term level through 1.0410 is clearly significant, but again it’s not “quite” as significant as the two levels just mentioned. As you can see, some of drawing in your levels and deciding which is more important than the other can be left up to your own interpretation, but at the same time you should have a logical line of reasoning such as “this level has held price more times”, or “that level created a larger move”, etc. Example 4: USDJPY DAILY CHART. In the USDJPY example below, we are looking at all “key levels” because I did not see any that I considered to be short-term levels.

The reason being, every level I’ve drawn in has created a significant turning point. The USDJPY most recently has been breaking higher, and if the resistance near 80.37 gives way we will likely see another leg higher. Of special note in this chart are the bar tails or wicks. Note how some of the levels are not drawn exactly at the bar highs or lows but rather through the middle portion of the tail. This is important, and it’s one of the myths I mentioned at the start of this lesson; you don’t always have to draw your SR levels exactly at a bar high or low. In fact, it’s more important to have a lot of tails touching a level than it is to have a level exactly at two or three bar highs or lows. An example of this is the level at 78.79 in the chart below; note how I drew it through as many bar tails (or wicks) that I could, rather than moving it further up and just hitting the exact highs of a couple bars. Drawing your levels in this manner gives you a better reference point to look for signals from since you are getting closer to the mean or average turning point price in the market, so it’s basically a higher-probability level than a level that’s further out but exactly at a bar high or low. That’s not to say you will never draw SR levels at exact highs or lows, because you will, a lot, but it just means you don’t always have to draw them that way and won’t always want to. Example 5: NZDUSD DAILY CHART. In the NZDUSD chart below we want to take note of what I refer to as a “value area”. Now, what I mean by “value area” is basically just an area where it’s obvious that price “likes” to be. This is essentially just another word for consolidation, since an area of consolidation on a chart is essentially where a market has found “fair value”. These value areas typically act as support or resistance zones, and this means when price retraces back to them you can watch for price action trading strategies forming at them. You will also sometimes have existing support or resistance levels that basically run right through the center of a value area, showing about the middle of the value area, and we can see this clearly by the blue line in the chart below. In this specific NZDUSD example that blue value line would be a good support to watch for buy signals if price rotates lower soon. Example 6: USDCAD DAILY CHART. The USDCAD daily chart below shows us a good example of the “value” concept that I discussed in the last example. Note how price formed that area of consolidation or “value” marked on the chart below, and then later price retraced back up to it and found resistance exactly at the center of the value near 0.9883 on October 3rd. Then, after price finally broke back above that value level it formed a price action setup after it retraced back down to it, as we can see an inside pin bar combo setup formed showing rejection of that same level.

So, here’s a very simple strategy for you; wait for a key level to break, then wait for price to retrace back to it and look for a price action setup entry trigger to form near the breakout level in the direction of the initial breakout. Example 7: EURJPY DAILY CHART. We can see in the EURJPY chart below that it’s been in an uptrend since about the end of July. This uptrend has had some pretty large counter-trend retraces, which of course we need to mark with levels. We can see in the chart below the support levels and zones left behind by the different points in the market were the retrace ended and the uptrend resumed. Also, in a trending market like this, we can watch the previous swing points for price action signals as the market retraces back to them. For example, in an uptrend we can look for price action entries at the previous resistance swing points in the market which turn into support after price breaks up past them. We can see a clear example of this in the chart below with the recent pin bar trading strategy that formed at the shorter-term support through 102.50 area, note that this level was previous resistance. Example 8: XAUUSD DAILY CHART. In the Gold chart below, you can see I’ve gone back about 8 months in drawing in my long-term levels.

This is about the farthest back I typically go when drawing in my levels on the daily charts. Again, longer-term “key levels” are those levels that clearly caused a significant change of direction in price and or held strong on multiple tests across time. Shorter-term levels are those that caused less significant price direction changes and may be “newer” levels. You don’t have to get carried away drawing in too many of the shorter-term levels though, just use common sense and decide which are the most obvious and draw those in. If you put too many support and resistance levels on your charts you’ll end up with a messy chart that just confuses you and might even cause you not to trade because you think there are too many levels for the market to have to move through. This brings me to a very important point you should remember: In an up-trending market, resistance levels will often break, and in a down-trending market support levels will often break. I say that because I get a lot of emails from traders telling me they can’t get a proper 1:2 or more risk reward ratio because there are too many support or resistance levels in the way. Well, you have to look at the market context that your trade setup has formed in and use some common sense and discretion…not every little level you find is significant. Example 9: DJ30 DAILY CHART. In the Dow Jones futures chart below, we can see the current picture of key levels that are relevant for this market. Of special note, we can see how consistently these key levels hold as price retraces back to them. Knowing that price often bounces or repels from key levels is a very valuable piece of information. Indeed, a big portion of my trading theory revolves around waiting patiently for an obvious price action setup to form at a key chart level as the market retraces back to it.



Articles:

  • How to identify key price levels in forex