Levels are a key component of technical analysis. Traders use them to identify potential price reversal points, support and resistance areas, and forecast future market direction. Understanding how levels work is essential if you wish to achieve consistent trading success.
Level analysis is the backbone of many profitable strategies, and seasoned professionals like Alex Gerchik rely on this tool, which has proven its effectiveness time and time again.
Imagine a price chart as a battlefield between buyers and sellers. Levels are critical areas where they are fighting for the price. Levels are formed in areas of intense trading activity, where major players defend their positions or take profits.
Highs and lows on a price chart resemble peaks and troughs, which point to the price reversal points. Round numbers such as 1,000, 1,500, or 2,000 serve as psychologically important marks recognized by all market participants.
Support levels are areas where demand exceeds supply and price tends to bounce upward.
Resistance levels are areas where supply exceeds demand, and price typically bounces downward.
- The higher it is, the stronger the level is.
- Daily and weekly levels carry more weight than intraday ones.
Levels don’t appear out of nowhere: the more times price tests a level and bounces off it, the stronger that level becomes. Strong levels often emerge around major news events that trigger volume spikes, or in price areas where large market participants are either taking profits or accumulating their positions.
Levels help traders:
- Identify entry and exit points
- Set stop-loss and take-profit orders
- Evaluate trend strength
- Identify consolidation and breakout areas, or forecast potential future moves.
When the price moves closer to a level, it might bounce off of it, break it out, or consolidate around it. The way it reacts depends on the level’s strength, trading volume, and overall market sentiment.
Here’s an example:
Picture that a stock has repeatedly bounced off the $100 level. This suggests that there is a concentrated buying interest there. When the price nears $100 again, there’s a strong chance of another upward bounce, which a trader can use to go long.
Trading levels increase the trader’s chances of identifying entry and exit points, since, as we discussed earlier, these are the areas where major players defend positions or take profits. This means the price is more likely to react when it is near them.
There are a few key strategies used to trade levels.
- Bounce trading means entering against the price movement before the level.
- Breakout trading means entering in the direction of a level breakout.
- Range trading means entering inside the range between two levels.
- False breakouts are used to trade against the initial movement after the breakout happens.
Bounce trading is when the price reaches a level but fails to overcome it and reverses direction.
How to trade it:
- Wait for the level to be tested and for a confirming signal like a reversal candlestick or divergence.
- Enter after confirmation of a bounce.
- Place a stop loss behind the level and take profit at the next key price level.
- The more touches the level had in the past, the greater the probability of the bounce.
If the price moves beyond the level and consolidates above or below it, this suggests movement continuation.
How to trade it:
- Wait for a strong breakout with increased volumes.
- Enter after a retest if the price returns to confirm the breakout.
- Place a stop loss behind the level and aim for a take profit 2–3 times the stop size.
- Avoid entering on the first touch, and wait for breakout confirmation.
A trading range is formed when the price moves between support and resistance levels.
How to trade it:
- Buy at the lower boundary (support).
- Sell at the upper boundary (resistance).
- Place a stop loss beyond the range, and set a take profit at the opposite level.
- This method works as long as the market stays within the sideways range, though it’s important to keep in mind the possibility of a breakout.
While trading levels can be a powerful strategy, you need to keep in mind that levels don’t guarantee success. They simply mark potential areas of interest, which is why it makes sense to couple them with other technical tools like indicators and chart patterns.
For those who aim to study and understand level trading on a deeper level and master chart analysis, Gerchik & Co offers free training with a mentor bot. This tool is designed to help you:
- Build practical skills in identifying levels and chart patterns to be able to pinpoint optimal trade entries with minimal risk.
- Develop a professional approach to market analysis and recognize profitable setups.
- Manage risks and systematize your trades.
The mentor bot allows you to acquire basic knowledge and hands-on skills in just 9 lessons. No fluff and confusion, just simple and accessible guidance. As a bonus, you will also get your hands on a trade entry checklist, a trading algorithm, and a trader's handbook for bold, independent trading.
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