Definition of Price Levels
Price levels are set currency prices; they define points with regard to the worth of a currency for a buyer and a seller. They are beneficial to various traders, but retail traders are the ones who can use them the most for higher profit potential. By nature, their employment can determine order and regularity in the forex market. Since market movement is considerably random, better forecasts can be made by relying on pre-set price levels.
Moreover, in forex trading, there is a strategy referred to as price level trading (price action trading, to some). It requires proficient knowledge of price levels and the method of using them to increase profitability; alongside, price action analyzers such as candlesticks, charts, and bars are part of the deal. Granted that he has sharp analytical skills, a trader holds the clues to virtually every action (including the slightest market movement) of prices.
Elements of Price Levels
Although it can be said that they are merely descriptive of price changes, price levels should be subject to further analysis; particularly, price levels’ market liquidity, as well as market volatility, should be examined. The analysis process may be categorized under technical analysis, but it includes an aspect that does not require technicalities; it involves the behavioral analysis of the general market.
Upon closer inspection, price levels are determinant of various market actions. This is why meticulous reviews should be done; an analyst can discover that it comes with different elements.
Common elements of price levels analyzed by Fibo Group:
Breakouts – they are elements that describe price movement beyond a pre-determined (by the forex trader) price level; they are supposed to signify the end of a price trend
Pull-backs – they are elements that describe the debut of a different price level (i.e. they tend to disrupt the original price level)
Shaved bars – they are observable elements in a strong price trend
Spikes – they are elements that describe an initial price trend; identification of spikes can be rather challenging
Trend channels – they are elements that describe a pair of price levels; they point out price levels that are located on either side of the forex market
The Rule
As observed, the profit potential of price levels lies in the occurrence of repeated price levels; price levels are revisited usually at consolidation and reversion points. It follows that since price levels are known to re-appear, raising a trader’s forex profitability involves waiting for (at least) one previous level to be reached.
In this regard, it is important for a forex market participant to abandon his expectations (that a pre-set price level will be revisited) at the right time. If the price action seems too unpredictable, the pursuit of another price trend seems practical.