Reliably Finding Strong Price Levels to Trade

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Reliably Finding Strong Price Levels to Trade

The European session opened up with a decent amout of volatility on the GBP/JPY, with large wicks on the opening candles spanning over fifteen pips. The market first rose up to the daily pivot level of 172.264 although no trade set up in the way in which I approach the markets, given the close above the level.

The pivot did eventually hold and on the way down I began targeting 172.100 as a support level for call options. In the image below, you can basically observe why I had this level marked off as having trade potential. There were basically three prior instances within the past few hours that had supported 172.100 as a support level. And on all three occasions it had acted as a shelf for price to rest on.

Of course, I needed some sort of price action confirmation for me to get into a call option. I never trade just the level itself, as it’s too risky. Support and resistance by itself in isolated form isn’t a great strategy/system to trade, even if you’re targeting major levels only like pivot points and the one seen here created from previous price history. It’s important to consider the price action, as well, in addition to trend and momentum, most notably.

The 4:10(AM EST) candlestick did bounce off 172.100, as did the 4:20 candle. The case of two five-minute candles showing rejection gave me enough confidence in looking at getting into a call option on the next touch of 172.100. Oftentimes, in the case I’m considering a trade against a recent trend or bout of movement contrary to the direction of my intended trade, I’ll look at more than one rejection (confirmation) candle to help validate its robustness as a price level worthy of trading. As such, this is what I did here.

I got into a call option on the touch of 172.100 on the 4:25 candle. This trade did spend a decent amount of time against me, going two pips out of favor before rising a pip in favor. In the end, I wound up with a two-tenths of a pip winner. This is a slim margin indeed, and one could definitely say some luck was involved. Nevertheless, the general prediction that price would hold on the fourth consecutive test of 172.100 did come to fruition and price began to break higher again just after 5AM EST.

Pivot re-established itself as a resistance level on the 5:20 and 5:25 candles, neatly closing and opening at the level and rejecting further upward movement. The bearish 5:30 candle was exactly what I was looking for in terms of showing that selling movement was in play. It’s really exactly what you might want to see at a resistance level when you’re considering a put option set-up. After all, if you’re considering a put option trade, you might want to actually observe some sort of selling tendency in the market first as evidence supporting that position.

The 5:35 candle did not touch the pivot level, but the 5:40 did where I got into a put option at 172.264. This produced another rejection initially, but buying movement continued afterwards and I lost this trade by a couple pips.

The market would hang around pivot until around 7AM, although no real call option opportunities emerged. Given the uptrend all the way from 172.100 and through the pivot, it wasn’t entirely surprising that resistance 1 (172.435) was the next level in sight.

And like the pivot level in the previous trade set-up, the price action around resistance 1 was similar. Price rejected 172.435 on the 7:25 candle, held below on the 7:30 (reaching five pips below resistance 1 at one point), before coming up to reject again on the 7:35. Like previously, I waited for this second rejection of the level to help validate that price as a solid area for reversal, given I was up against an uptrend.

After the second rejection, I looked to get into a put option on the next touch of 172.435, which occurred on the 7:40 candle. This trade spent a little time out-of-the-money, but by no more than a pip or so, before going up to five pips in favor, before closing as a three-pip winner. This level did hold, so I could also feel good about the overall idea behind the trade and my reading behind the market.

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Price Level

What Is a Price Level?

A price level is the average of current prices across the entire spectrum of goods and services produced in the economy. In more general terms, price level refers to the price or cost of a good, service, or security in the economy.

Price levels may be expressed in small ranges, such as ticks with securities prices, or presented as a discrete value such as a dollar figure.

In economics, price levels are a key indicator and are closely watched by economists. They play an important role in the purchasing power of consumers as well as the sale of goods and services. it also plays an important part in the supply-demand chain.

Understanding Price Levels

There are two meanings of the term price level in the world of business.

The first is what most people are accustomed to hearing about: the price of goods and services or the amount of money a consumer or other entity is required to give up to purchase a good, service, or security in the economy. Prices rise as demand increases and drop when demand decreases.

This is used as a reference to inflation and deflation, or the rise and fall of prices in the economy. If the prices of goods and services rise too quickly—when an economy experiences inflation—a central bank can step in and tighten its monetary policy and raises interest rates. This, in turn, decreases the amount of money in the system, thereby decreasing aggregate demand. If prices drop too quickly, the central bank can do the reverse: loosen its monetary policy, thereby increasing the economy’s money supply and aggregate demand.

The other meaning of price level refers to the price of assets traded on the market such as a stock or a bond, which is often referred to as support and resistance. As in the case of the definition of price in the economy, demand for the security increases when its price drops. This forms the support line. When the price increases, a sell-off occurs, cutting off demand. This is where the resistance zone lies.

Price Level

Price Levels in the Economy

In economics, price level refers to the buying power of money or inflation. In other words, economists describe the state of the economy by looking at how much people can buy with the same dollar of currency. The most common price level index is the consumer price index (CPI).

The price level is analyzed through a basket of goods approach, in which a collection of consumer-based goods and services is examined in aggregate. Changes in the aggregate price over time push the index measuring the basket of goods higher. Weighted averages are typically used rather than geometric means. Price levels provide a snapshot of prices at a given time, making it possible to review changes in the broad price level over time. As prices rise (inflation) or fall (deflation), consumer demand for goods is also affected. This leads to broad production measures such as gross domestic product (GDP) higher or lower.

Price levels are one of the most watched economic indicators in the world. Economists widely believe that prices should stay relatively stable year to year so they don’t cause undue inflation. If price levels rise too quickly, central bankers or governments look for ways to decrease the money supply or the aggregate demand for goods and services.

Although prices change gradually over time during inflationary periods, they can change more than once a day when an economy experiences hyperinflation.

Key Takeaways

  • The price level is the average of the current price of goods and services produced in the economy.
  • Price levels are expressed in small ranges or as discrete values such as dollar figures.
  • Price levels are a leading indicator in the economy; rising prices indicate higher demand leading to inflation, while declining prices indicate lower demand or deflation.
  • In the investment world, the price level is referred to as support and resistance, which help define entry and exit points.

Price Level in the Investment World

Traders and investors make money by buying and selling securities. They buy and sell when the price reaches a certain level. These price levels are referred to as support and resistance. Traders use these areas of support and resistance to define entry and exit points.

Support is a price level where a downtrend is expected to pause due to a concentration of demand. As the price of a security drops, demand for the shares increases, forming the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.

Once an area or zone of support or resistance is identified, it provides valuable potential trade entry or exit points. This is because, as a price reaches a point of support or resistance, it will do one of two things: bounce back away from the support or resistance level, or violate the price level and continue in its direction until it hits the next support or resistance level.

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