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It has been asked many a time I’m sure, where traders get their levels from. Indeed, without any knowledge of the specific approach to technical analysis an individual uses, it may be particularly difficult for the non-initiated to understand why certain prices are being singled out as important. There are two ways to identify levels, which are in my opinion complimentary to each other. The first is simply objective structural reference points. Like for example, swing highs or swing lows. They are fixed price points where important action has previously taken place. The other way is subjective activity based reference points where price specific important trading hasn’t taken place. This might be for example, a moving average or a trend line. This technique is trying to define the current mode of trade. It is my opinion that there is no right or wrong way to go about either of these types of analysis. There are many different ways in which different traders successfully define their levels. The key is to have an approach which is as consistent and as unambiguous as possible. I feel it’s important to recognize the variety of methods which are used and to understand that whichever you use, most other participants will be using something else. Possibly even the vast majority of people. It’s my opinion that the very best levels can be transposed between methods and thus the number of participants who have interest in a specific level increases drastically. This is the importance of confluence. I will briefly outline the basis for my approach to defining levels. Objective reference There are two main approaches I use here which are less straight forward than they might first seem:- Volume areas & highs/lows. 1)Volume areas. The peaks and valleys of volume at price provide an excellent indication of where prices have been accepted and rejected in the past, if they are used properly and consistently. What I mean by properly is the period the volume profile takes into account must be identified for good reason. For example, it could be that I want to look at all the volume at price since the start of a prolonged uptrend, or it could be that I’m looking at a recent bracket/balanced area or trade, or even I could simply want to view this volume by day/week/month/quarter/year. The thing that I particularly like about volume at price is that no matter what each participant’s methods are, the profiles show up where they traded. What I like less is that they take no account of time. Whether you agree with this or not is up to you, but I feel that time is one of the bounds of any auction, so along with price and volume, it is important to monitor. This is where MP helps to some degree. Because market profile is based on time (in general each 30min time block is assigned a different letter and so when that price trades in that block, the letter is placed next to the price once, regardless of how much is traded) it is easier to see where quick and big moves have happened and ended. You can always just look at candlestick/bar charts or whatever else, but the way it shows up as “single prints” in a market profile, is particularly clear to me. 2)Highs/Lows. Here I am looking for the most recent highs and lows of market swings, intraday sessions, weeks, months, brackets and anything else which may be significant. They show very specifically where the last auction extreme ended. So if when the market gets there again, the perception of value and what is “unfair” I still the same or similar, the market should reverse from the same area. In particular, I am looking for strong and weak reversals. A strong reversal would be one where we move very quickly away from a new swing high or low, a weak one would be where the market ‘butts its head’ against the level a few times possibly with diminishing volume on each subsequent attempt. These are important markers. I’d also point out that this doesn’t necessarily take into account the beginning of a move. So for example, the start of a big move directly after an out of line US jobs report could have significance. Or if a balanced market which is winding up (or forming a pennant) before a break, the point at which the activity changes is important potentially. It’s the break before the break- or the point at which the activity changes. Subjective reference The subjective analysis I use tends to be based on near term activity more than longer term activity for much of the time. I do pay close attention to the longer term subjective activity of a market of course, but as I’m a day trader and one who doesn’t use subjective analysis alone for entry, what affects me the most is frequently what has just happened. Some of the things I look at as a measure of subjective market action are:- Fibonacci retracement/extension levels. Rotational intensity. Value Area movement. VWAP. Trendlines. Fibonacci retracements and extensions are something many people do not like. I wouldn’t like them either if I were to use them in the same way, but I don’t. I went through how I use them here. Rotational intensity is about the amount of retracement on each counter-trend move. Is it unusually large or small? Is it increasing or decreasing? Is it fast or slow? A change from what I am seeing at a certain relative level, warns me the market might be turning. Value area movement is very simple. The value area is basically the 1st standard deviation of volume (or TPO in MP) and shows where most of the volume has traded in a specific period. If the VA is moving one way or another, in much the same way as the rotational intensity, a change could warn me that something is different now. VWAP or volume weighted average price is a metric used by institutions. Time spent moving away from the VWAP shows the volume is progressively being traded in one direction. When price oscillates back and forth across the VWAP, it’s more likely that for that specific time period, the trade is at least to some extent, balanced. Trendlines and channels are important to me as an indication of market mode. I find behavior often becomes very linear and uniform the stronger the market is adhering to a particular line. So when that line is taken out, I’m on alert. If it’s taken out the market can either move into short term balance before deciding to continue or reverse, or it can break and reverse hard and fast. Sometimes it’s a hybrid of the two which happens. The specifics which I have mentioned are by no means exhaustive and I certainly do not believe that they are the be all and end all to trading. It’s always important for me assess my levels and assign a degree of importance to each. For example, one way in which I assess volume is that the more recent and the more defined (very high or very low volume compared with adjacent areas), the more important the area is. Confluence between objective and subjective levels (or between themselves) is also a particularly important idea to me. It means that there is a higher chance that others are viewing the level and that whatever happens there, it will be of some importance to the overall auction. How do I take into account different methods others use? It’s very difficult to do this at all if I’m honest. The trouble is that there are so many ways to look at the market. The volume profile is the backbone of my analysis because it shows where the market has traded no matter what the methods used to analyse it. So what are your favourite methods to pick out levels? 1) What is the level and what does it represent exactly? 2) To which market and how do you apply these levels specifically? 3) How do you use them in your trading?