How to Identify Key Levels
There are three main types of key levels, and you are most likely familiar with them all even if you’re a novice forex trader. So identifying them should be quite easy.
The Horizontal Key Level
The horizontal key level is made up of support and resistance levels. But we aren’t talking about just any support and resistance level. We’re referring to those with lasting historical significance. You’ll find these horizontal key levels on the higher timeframes, such as the weekly and monthly timeframes.
The horizontal key levels remain active for months and years, and the price mostly never gets across them without strong opposition. In the chart above, notice how the level keeps getting a lot of reactions from the price before it finally breaks.
The Slanting Key Level
The slanting key level forms on trends. It appears as a trendline on the chart. And just like their horizontal counterparts, slanting key levels mostly form on the weekly and monthly charts.
The Rounded Key Level
Rounded levels on the charts also form key levels. Our article on rounded levels tells you everything you need to know about rounded levels. But for the sake of this article, rounded levels are those price levels that are easily divisible by 100. They often end with two or more zeroes.
Traders often place their trades around the rounded key levels because it is psychologically easier and simpler to trade at 120.00 as opposed to 119.97 The same way you would say you bought an item for $100 when you actually bought it for $99.99.
Tips on Trading Key Levels
Here are some tips have at the back of your mind when trading the key levels:
Pick your key levels from higher time frames. The key levels on the higher timeframes tend to be stronger than those on the lower timeframes. The reason is that this is where the market movers, big banks, and other institutional traders make their trades. Any level below the 4-hour chart could easily falter and is prone to false breakouts. But to be on the safe side, use the key levels on the timeframes higher than the daily chart.
Set your stop losses wisely. Where you place your stop losses could make or break your forex account. There are many schools of thought when it comes to setting stop losses, and each one is perfect for varying trade scenarios. But one objective method of setting stop losses that works for most trading scenarios is using the Stop Loss Cluster indicator.
The Stop Loss Cluster indicator tells you where most traders have placed their stop losses. And these are the levels the price is most likely to hit during a false breakout.
Conclusion
You too can base your trades on these key levels. But make sure you follow the strategies and tips we have discussed to help you make the best of the key levels