Understanding Levels

How To Trade Levels Like the Pros

Posted Sunday, May 20, 2018 by
Rowan Crosby • 2 min read

I would suggest that the most important trading lesson I ever learnt was about levels. When I was a new trader I felt like I was simply drawing random lines on charts and calling them ‘levels’.

In truth, I think the human brain is so good at finding patterns that it can make patterns out of almost anything. If I showed a completely random set of time series data, I think you could probably apply some form of technical analysis to it.

Levels is certainly a tool that the vast majority of traders use. And the conventional wisdom is really that you buy a break above say a resistance level. Or sell a break of support. But is that too simplistic?

To answer that question we have to ask, what is actually going on at a certain level?


Understanding Levels

Levels are created because there has been buying and selling that has occurred there in the past. Some might say things like pivot points or fibonaccis are levels, but to me I don’t really count them as true levels.

I see a level as a clear top or bottom in the price action. Or perhaps a gap that has been created from the change in session or over the weekend.

Whatever the cause of the level, I think the most important thing is that it is clear and obvious. And the more clear and obvious the better. I don’t subscribe to the idea of hidden levels as such. If you’re able to access market depth (common in futures trading) you might say that there are hidden levels to some degree. But to me,I want super obvious levels, like swing lows and highs or round numbers etc.


Big Money Moves Markets

When price moves close to a level there are often traders lined up to say ‘buy the breakout’. Such is the conventional wisdom surrounding technical analysis.

The only problem with that thinking is that it is the big money that moves markets. And they are often doing the opposite of what the majority are thinking.

When price moves up to a resistance level, it is the big money that is going to be pushing it through.

Have you ever heard of stop runs? That’s when price runs through an area where there are many stop loss orders.

Well, that’s the big traders running the stops. In the example of an area of resistance, they are the ones buying before the breakout, and covering as all the stops are triggered. They are out while all the retail traders are buying.

They know this is a place where there are stop orders because the level is super obvious. It’s not hidden. They know where the orders are and they run through them.

So how can you do the same?

Easy. You need to start looking for these super obvious levels and be prepared to enter prior to the breakout. And look to cover on the other side.

Is this a perfect strategy. No. There’s no such thing.

But by putting yourself on the same side as the big money it is certainly a smart way to trade.

Do you agree with my thoughts on levels? I would love to hear your thoughts.

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