I have to make a confession: I really like computer games. Especially those, where you can improve your character, learn new powerful spells and level up. For every level up, you know you have advanced, well, to the next level. Wouldn’t it be really nice to level up your trading too? Let’s have a look at how using levels (pun intended) of strong support and resistance can help us with finding interesting trade setups.
Looking at this EUR/GBP monthly chart, we can easily spot this major level with several precise touches. Usually I use the monthly chart to get the general market direction and momentum, in this case it’s bullish. Then, I drill down to the weekly timeframe to validate the level and determine the trend on this scale
We can see, that the market has clearly reacted to that level several times and is paying close attention to it. The bullish momentum from the monthly chart is being confirmed by this lower timeframe.
Looking at the daily chart we can see that we are currently trading right at the level. So maybe there might be a trading setup hiding there somewhere?
On the 4-hour chart below, I have found a rather interesting setup. Over the last few days EUR/GBP has been trading above the strong level defined on the monthly chart. Price has dipped below this level several times, but has always come back to it. And, those tests of the level have become less and less pronounced, creating a series of rising higher lows. At the upper side of the price action we have established a flat level (green dashed line) with two precise and one close touch. Looking at our indicators we can currently see convergence, raising the probabilities of a breakout above the green level. The stop for a potential momentum breakout trade could be situated below the recent lows around 0.83, this stop receives protection from that highly significant level, potentially lowering the probabilities of being stopped out.
Are levels the holy grail of trading? Unfortunately, they aren’t. But they can form a very solid building block and support or veto any trading setup. So why don’t you start leveling up your trading with levels? New high score, here we come…