Where a level comes from
A level is not a line somebody drew. It is a price area where a lot of trading actually took place — where buyers and sellers spent time disagreeing, changed hands in volume, and formed opinions they are still holding.
That is why levels work at all. The people who transacted there have positions, and those positions have consequences when price comes back. A line drawn across a chart because it looks neat has none of that behind it.
How to draw one
Two rules, and they are enough:
- Use a zone, not a line. Run it from where the bodies clustered to where the wicks reached. A level with a top and a bottom is a level you can use; a level with one price is a level you will argue with.
- Draw it from the left. Find the area on older data, then look at what price is doing now. Drawing it from the right — fitting a level to the candle that just printed — is how you convince yourself of something that was never there.
What makes a level strong
Three things, in rough order of importance.
- Time spent there. A band price traded inside for two weeks matters more than one it touched for an hour.
- The number of touches — up to a point. Two or three tests confirm the area is real. A fourth and fifth start to suggest the opposite: each test consumes some of the orders sitting there, and a level tested repeatedly is a level being worn down.
- How price left it. An area that price departed sharply matters more than one it drifted away from. The sharp departure implies orders were left unfilled, and unfilled orders are what bring price back.
A level that has held four times is not four times stronger. It is four times more likely that everyone can see it.
Round numbers
Round figures behave like levels more often than chance would allow, and the reason is unglamorous: people place orders at them. Stops, targets and alerts cluster at round hundreds and at strike prices, so those prices accumulate resting orders for no structural reason at all.
Treat them as a secondary consideration. If a round number sits inside a zone you drew from actual trade, it strengthens the zone. On its own, with no history behind it, it is a coincidence waiting to disappoint you.
Drawing twenty levels on one chart. If everything is a level, nothing is. Three or four zones on a screen is a working chart. Twenty is a chart that will confirm whatever you already believed when you opened it.
Read it yourself
Find the zone before you reveal it.
- How many times did price test the same area?
- Where would you put the top and bottom of the zone, and why those two prices?
- Is this level getting stronger or weaker with each test? What tells you?
Show answers
1. Three clear tests, spaced roughly four candles apart.
2. About 100.6 to 101.5 — the wick lows set the floor, the cluster of closes sets the ceiling.
3. Weaker, on the evidence here. Each test reaches slightly further into the zone than the last, which is what a level looks like while it is being consumed. Price did hold and break higher — but the reading before that happened was "this is thinning", not "this is unbreakable".
Terms used
- Support
- An area where buying has repeatedly overwhelmed selling, stopping declines.
- Resistance
- An area where selling has repeatedly overwhelmed buying, stopping advances.
- Zone
- A level drawn as a band — bodies to wicks — rather than a single price.
- Test
- Price returning to a level and reacting to it.
- Consumed
- The orders that made a level meaningful having been gradually filled by repeated tests.