My ultimate guide to identifying key price levels By Adam Harris, 12 February 2020

So...I’ve been writing this book about trading for a while now, and I won’t lie, it could still take a while longer, but in the meantime, I am inspired to write this shorter piece on this one topic because I believe that there are many traders out there who want accurate and definable ways to sort out their horizontal levels once and for all.

Generally, struggling traders can be placed into one of two categories; they’re either absolute beginners or ‘intermediate’ traders who are not applying the basics (important/fundamental) techniques consistently. 

When technical analysis is mastered and understood correctly, the market’s seemingly random behaviour actually makes sense. When NOT understood or applied correctly, then traders find themselves seeking a news-based explanation for what happened or ‘why’, and this inevitably leads to a life of trading misery, as leaning on the news as a crutch is where potentially decent traders go to die. 

Now, onto the topic at hand.

There are several schools of thought about techniques to identify key levels, and I aim to cover them here, as well as propose a universal approach for those interested. 

First, some ground rules- think of these as the inimitable laws of the nature of financial markets everywhere:

• Round numbers matter e.g. 1.0000 (parity in currencies), 16,000, 1.2500
• The more zeroes, the more potential significance. 
• Before charts existed, price numbers were ‘everything’
• Horizontal levels exist forever, diagonal trend-lines eventually fade into the past.
• Sometimes price turns exactly on the number, other times there’s a zone around a level.
• Yes, you can occasionally get two key levels close to each other.
• Levels than can be identified on the Monthly and Weekly timeframes matter more
• Levels that have been tested as Support AND as Resistance are more significant
• Sometimes the chart is just a mess
• If in doubt, or it’s getting too messy, delete all lines and start fresh

Getting started

Switch the chart to display price as a traditional line chart:

Change the display style to ‘line’ chart.

Proceed to place horizontal levels that ‘fit’ best. 

We’re always, always focusing on a ‘best fit’ approach. Lean towards standout, obvious levels first, and in order to avoid ‘analysis paralysis’, or clog up the charting platform, only work around current price in either direction. 

I’ve only done the Daily chart in this case, and there are sufficient levels for now. Three to Five levels above and below price is more than enough.

If you find you have two levels very close to each other, consider choosing the levels that are based off of more recent price action.

Let’s revert back to the Candlestick display to see the end result. 

Now, I’m going to add another dimension to this. I’m going to do exactly the same exercise, but I’m going to check the line chart on the Monthly, Weekly and Daily timeframes, and identify key levels in that order. I’m also going to colour-code the levels as per time-frame: Green for Monthly, Red for Weekly, and Blue for Daily. 

This is what the Daily chart looks like now:

And it translates very well down to the lower timeframes, such as the 4-hour chart:

By the colour of the level, I can determine the ‘seriousness’ of that level ahead of time. 

But...what about levels below the Daily, I hear you ask? What about the 1-hour, and the 4-hour?? What if I am an intra-day trader? 

Traders have two options in this case:

1. It’ll reduce stress to only add levels that are clearly visible on the 1-hour timeframe for the last 2-3 weeks at most.
2. Use traditional pivot levels instead. These are very reliable and using the traditional calculations can add levels that almost always explain why price stopped in ‘mid-air’ for no reason. 

Here is the same chart with manual levels added in:

And here is the same chart with pivots used instead of hand-drawn levels.

As demonstrated above, levels produced by the pivot indicator comfortably identify key price levels without too much clutter. Traders should take careful notice of pivot levels that closely align with manually identified key levels, as those areas will likely hold greater numbers of pending orders. 

Other approaches

Instead of manually identifying levels using a line chart, we can draw directly onto a candlestick chart. 

Again, it’s crucial to aim to place levels that connect as many points as possible.

But, should I place it on the candle body or the candle wick? This is an oft-repeated question that stems from a weak idea that has somehow gained credence, which henceforth shall be known as a ‘Trumpism’. Levels will be where they will be, and price will react to them regardless. The levels do NOT care how price ultimately reacts to them, and the levels are real, so we focus on the levels, not how price shapes itself each time.

In reality, and from experience, the levels will connect with some candle’s wicks, and other candle’s bodies. This is perfectly acceptable. Ignore a clearly visible level, because it touches wicks instead of bodies, at your own peril.

The chart below is the exact same one as above, but with the levels adjusted to the candles by eye. The changes are either unnoticeable or insignificant. 

Order Flow

Order flow is an additional and reasonably important aspect of technical analysis to be aware of, but for the purposes of this article, I’ll be analysing price in order to identify key turning points indicative of order flow. In other words, looking at the chart to spot big turning points in price which imply substantial changes in the flow of orders. 

In the chart below, I’ve circled the big turning points, and I notice that some also connect with previous or future turning points, thus confirming their value. (Just so you, the reader, know what I’m talking about)

Next, I’ve drawn lines showing the zig-zag of price, showing the effective ‘flow’ of price with its key turning points. (Again, this is just to point out these turning points to the reader)

And finally, I’ve placed levels that connect these turning points, while at the same time connecting as many highs and lows as possible (best fit). 

The end result is almost exactly the same as using the methods above, except that it’s a little cleaner, less cluttered. There are only 6 key levels in this chart, using this technique, compared to 7 or 8 in the prior chart using the non-order flow techniques. 

Summary

• Levels drawn against Candlesticks charts or Line charts produce almost identical results, and can be interchanged with practise. 
• If a level is placed at 1.2996, then the key level is likely 1.3000, for example. 
• Don’t obsess- if you feel you’ve got too many levels, remove them all, and start again. There should only be 3-5 lines on either side of price. 
• Check that you’ve included the big turns i.e. the order-flow turning points from the Daily timeframe.
• Intraday levels can be placed on the 1-hour timeframe for notable levels less than 3-weeks old.
• Classical pivot levels are reliable indicators of intra-day price levels as an alternative. 

In conclusion, aside from price action, horizontal levels constitute the second-most important technical indicator that can be used. In fact, with only these two tools, price and levels, traders can trade quite successfully. 

Identifying key levels takes practise, but it does get easier over time, and helps traders gain confidence in their assessment of important price-related areas. 

Key levels help traders establish potential profit, technical stop-loss protection and strong entry levels.