KEY LEVELS & PRICE ACTION

What is a price level?

A price level on chart could be defined by plotting a horizontal line, but in fact the level is an area or zone and not a specific price value.

What is a key level?

Key level is a level that has a great history acting as support and resistance, in other words “a level of flip between support and resistance”.

Are there any other terms for Key levels?

Yes, it’s also known as Pivot Zone, S/R Flip and Swap Zone.

Are there different types of key levels?

Yes, there is a major key level and a minor key level depending on clarity and efficiency of the level.

How do we locate key levels on chart?

A picture worth a thousand words, the first type of key levels are the major key levels which you can locate easily from the first glimpse at any chart by defining swing highs and swing lows. The following chart shows daily major key levels for the pair EUR/USD, some prefer to set levels at the nearest round number if possible.

 If it’s still not clear how to locate these levels, then don’t worry because the next chart has the same levels with added coloured markers to indicate the key areas above and below the levels. Each group of pointers of same colour is assigned to one level.

 The second type of key level is the minor key level, which in some cases acts as a second option for a major key level and when combined together they form a key zone, although they have a less significant history compared to major key levels, and could cut through a wide range of candles. In the following chart minor key levels were added, using a different colour to differentiate them from major levels.

  

Once again, the next chart with added coloured markers for a better visual explanation.

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Price Action:

We have taken the chart which has both major and minor key levels and we divided it into two sides by a vertical black line. From the left side of the chart to the divider shall be considered as history and the right side as present time. The location of the separator was intentionally chosen because the same levels could have been located up to this stage without the existence of the right side.

Now, we will study the candle closes in relation to the key levels starting from the orange pointer where is written "start":

Price was moving above the lowest major key level then it moved up breaking through the higher major level with momentum and closed above it [1], the next candle retested the level and closed above the higher minor level [2] followed by multiple retests of the same level without any close below the level, later it tested the next minor level and failed to close above. Price consolidated in between the two minor levels [3]. When the decision was made price broke through the upper minor level and the next major level with high momentum and closed above the two levels and below the next major level [4], third candle broke through the major level closing above it and below the next minor level, followed by a retest of major level and a close above the higher minor level [5], the next candle broke through the higher minor level and closed slightly above it and retested with the second candle[6] before moving up with momentum breaking through the next major level and closing above it [7]. Price failed to break the higher minor level and broke down through the major level with a close below followed by a retest and drop [8]. Price continued dropping breaking through lower levels till [9] where it failed to break the major level and closed above it, this was the first retest of this historical major level after a long time and we can see price bounced from it to [10].

Now we'll speed up the process a bit and concentrate on bigger moves. At [11] price had another retest of the same major level failing to close below it and it went up to [12] where it broke through the major level with a close above, but the next candle broke through the same level in the opposite direction and closed below, after a retest price declined to [13] where it closed above the major level and this was a fresh retest of a historical major level, a retest was done by the fourth candle and price rallied up to [14] and this is where we stop. I think now you can see the importance of key levels and candle closes, I left enough candles for you to read by yourself.

Conclusion:

Key levels are highly respected by price, and if price breaks through it and close above or below then it’s a sign of where price will go next, in most cases it will travel to the next level.

More often price will give another chance for entry when it retests the strength of broken level before moving to the next.

When price breaks through a level with high momentum and closes above or below without a retest then it’s a sign of big buying/selling.

By FX.Sniffer