Levels: the foundation of technical analysis
Short version for experts: tables, lists and screenshots only.
Words in this lesson (7)
What a level is
A level is a price where the market has already turned before. Big buyers and sellers met there, and the market remembers the place.
- Support is a level below the price: the price bounced up from it.
- Resistance is a level above the price: the price bounced down from it.
Broken resistance becomes support, and vice versa — levels swap roles.
How to draw a level
- Open the daily chart — we always start with the higher timeframe.
- Find the prices where the price turned two or more times.
- Draw a horizontal line. The more touches and the higher the timeframe, the stronger the level.
- Don't draw ten lines. You need the two or three nearest levels above and below.
The principle is minimalism. A clean chart with three levels is more useful than a chart with ten indicators.
The higher timeframe sets the direction
| Timeframe | What for |
|---|---|
| Daily | direction and the main levels |
| Hourly | refining the levels, the picture of the last few days |
| 5–15 minutes | the entry point |
We enter on the lower timeframe in the direction of the higher one. Buying on a five-minute chart against a falling daily chart is playing against big money.
Three formations at a level
1. Breakout. The price sat under the level for a long time, squeezing toward it with ever-higher lows, and broke above it on increased volume. Entry — after it holds above the level. Stop — below the level.
2. False breakout. The price went beyond the level but couldn't hold and came back. Those who bought the breakout are trapped; their stops speed up the move back. Entry — in the direction of the return, stop — beyond the extreme of the false breakout. It's one of the most reliable formations because the stop is short.
3. Bounce. The price came up to a strong level and turned without breaking it. Entry — from the level, stop — right beyond it.
Where the stop and target go
- Stop — beyond the level, with a small margin. If the level breaks, the idea is cancelled.
- Target — the next nearest level.
- Risk to reward — no worse than 1 to 3. If the next level is less than three stops away, we skip the trade.
Typical beginner mistakes
- Entering midway between levels — there's nowhere to put the stop.
- Buying a breakout without waiting for it to hold.
- Moving the stop further away as the price approaches it.
- Not keeping statistics on their trades — and not knowing which formation works for them.