Utilising Key Levels

We talk about Key levels quite a lot in our strategy but so far have never really covered them in much detail. It was only right we made an episode to cover how we use them and what to look out for.

A key level is essentially a rounded number for example, this could be 1.00000 on a pair such as USDCHF or a level such as 1.26000 on GBPUSD. It is essentially that these levels lineup with a clear market structure in order to add value to our trading.

It is important to note that some pairs will respect key levels more than others, what you will often find is that the top 4-5 most traded currency pairs will respect key levels much more than their more exotic brothers. It’s a great idea to backtest this to get a better understanding of how different pairs react to these Key Levels.

We use Key levels in 2 ways. To provide us protection and to use as an added confluence.

Added confluence

Key levels often provide a great level of support or resistance to your trade. If your area of interest is on or around a key level there is a good chance that institutional traders will be interested in the same region, key levels often line up with where these institutional traders will be placing their Buy or Sell orders. Of course, it is always good to have institutional traders on your side of the trade so straight away this is a positive. These guys can often give your trade the boost it needs to trigger other traders/algorithms.

Let’s look at an example:

This is an example of GBPCAD using 1.70000 as a key level. This is actually more of an intraday trade using our Pattern Play Strategy. In this example we have a descending channel pattern on the completion of it’s 3rd touch react perfect with previous market structure at 1.70000. In this example we would be using the key level as a true confluence in our trade as it lines up with our other confluences. You can see just by studying price action around this level just how much it does not like it. There are multiple occasions when price rejects heavily from the 1.79000 signifying that there is maybe the trend is exhausted and that the bulls will be entering the market. We have drawn out the RR tool so you know where we will be looking to get into this trade. Let’s now jump into the other scenario where we use Key Levels in our Trading.

Protection

Key Levels can also be used as a great way to protect your trade. Sometimes your area of interest might just be above or below a key level that has been respected in the past. However all your trading plan confluences line up to take the trade just under the key level (there is nothing wrong with this). In this scenario we can use the key level as a form of protection for our stop loss. If we were to enter above the Key level we would then place our stop loss comfortably below the level to avoid manipulation they may come in. This is so if the trade goes against us we will have that extra ‘fail safe confluence to turn the trade in our originally planned direction.

Let’s look at an example:

Here is EURCHF (a pair that really likes to respect key levels) as you can see price action was really slowing down just above 1.05000. If you were to look on the HTF here there have been multiple occasions going all the way back to the late 00’s where this level has been respected. So it is a true key level. Of course there are confluences to enter a trade long here we have a really nice slow down in price action forming a ‘falling wedge’ pattern that coincided with a local double bottom. Price action did not have to reach the 1.05000 to pop to the upside and it didn’t! However if we were to enter this trade we would look to have our stop loss placed below 1.050000 as an added protection.