The different types of levels with visual examples
The following article aims to provide:
- Information on the different types of levels that we evaluate
- Visual examples of the different types of levels, particularly applicable to Forex
Traders that are new to the concept and terminology of Supply and Demand trading might wonder what exactly are these so called levels, and what do they look like. They are simply areas of interest from a "Supply and Demand trading" point of view. We could call them "areas" and it wouldn't necessarily be wrong, but since their significance is seen horizontally (i.e. by wrapping the level between horizontal lines that extend to the right until the level is hit by price), it is probably more appropriate to call them "levels", as that's how they appear on the chart after marking them with horizontal lines. So don't expect anything exotic just because of the terminology. Supply and Demand is a minimalistic approach, especially when compared to how the average forex trader's chart looks these days, loaded with all kinds of arbitrary (and thus useless and irrelevant) addons that obscure the truth instead of revealing it.
So since the "levels" are nothing more than areas of interest, can they look like absolutely anything on a chart? The answer is no and yes at the same time. It is yes only because what looks like one pattern on one timeframe can look like another pattern if seen on another timeframe. But although this is true, in Supply and Demand trading we are looking for specific patterns that let us deduce that a specific area in the past has produced an imbalance between Supply/Demand and has left behind unsatisfied trading potential. And although (as explained elsewhere) it is not necessarily the same orders waiting there patiently, these areas of prior imbalance tend to renew institutional interest and cause specific market reactions that are predictable in a statistically meaningful way. These predictable reactions allow us to obtain lower risk entries and higher reward trades, and that's already more than half way to profitability if used properly.
These predictable reactions allow us to obtain lower risk entries and higher reward trades, and that's already more than half way to profitability if used properly
The way to properly identify candidate levels and evaluate the likelihood of a predictable reaction or the proper way to trade valid levels, is beyond the scope of this particular article, as all these topics are important and they deserve separate dedicated articles. You will find all this information in the articles that follow, but if it is the first time you read the articles and you have no idea what each enhancer is yet, then one thing to have in mind (which is the main part of enhancer #1) is the significance of the strength of the initial move away from a level. We mention this here because in the examples that follow this enhancer is visible (while the rest might not all be visible here, e.g. enhancer #2 which is the placement of the level on higher timeframes is not seen here). In some cases the sufficient profit margin (reward ratio) might also be visible (which is part of enhancer #3), while the market reaction to the first return of price to the level (part of enhancer #4) is usually seen below. The following examples are only meant to be general visual representations of the different kinds of levels, as a quick first impression and nothing else (examples of proper trades which include the evaluation of all enhancers are discussed elsewhere).
The different kinds of levels can be grouped into two categories: a) the levels that usually appear near tops and bottoms and consist of a "drop-base-rally' or "rally-base-drop" shape, and b) the levels that appear in the middle of major moves and so consist of a "rally-base-rally" or "drop-base-drop" shape (we call these "speed-bumps"). Both kinds of levels are equally important (as long as they are valid, as evaluated by using the enhancers) and are exactly the same except for the way they look (e.g. drop-base-rally VS rally-base-rally). The fact that we distinguish them is just so that we know that both kinds can be valid levels and it does NOT mean that one kind is better than the other, that depends on how well they fit the criteria of the Enhancers.
Important note: The examples below are provided as a simplified visual sample of what a level might look like. This article on its own offers nearly NOTHING regarding the proper identification, evaluation, and trading of possible valid levels. In purpose of making it clear that these are just visual samples, the images do not even include prices, pairs, timeframes, and other important details. You will find more and more valuable and actionable information as you progress through reading the rest of the articles.
A very simple Demand level with a clear, strong initial move. Drop-Base-Rally.
Two demand levels with strong initial moves. One at the bottom of the previous trend and one created in the middle of the new uptrend. Both are valid as far as Enhancer #1 is concerned. Drop-Base-Rally.
Another two Demand levels, one at the bottom of the previous trend (Drop-Base-Rally), and one in the middle of the new uptrend. The level in the middle is a Rally-Base-Rally type of level, the ones we call speed-bumps. Also note that in this example we have defined tighter levels by cutting their wicks (in this case we cut the upper wicks of the speed-bump, and the lower wicks of the bottom level. More about cutting the wicks in a separate article).
Two Supply levels with clear and strong initial moves, one at the top of the previous trend (Rally-Base-Drop) and one in the middle of the new downtrend. The level in the middle is a speed-bump, simply meaning that it was formed by a Drop-Base-Drop pattern. Both levels are valid as far as the first enhancer is concerned.
Please note that although the examples below include the reactions to the identified levels, they are presented as visual examples only, and do NOT imply that these levels met all criteria as required by the Enhancers. You will find complete cases with all enhancers evaluated in the results commentary section (Member Area). This article is meant to be just a visual quick-start guide and does not show the prices, pairs, timeframes and other important information.
A Demand level in the middle of a move (Rally-Base-Rally speed-bump), with strong moves before, and most importantly, after the move. The market reaction after the first return of price to the Demand level (as explained in Enhancer #4) is also visible.
A Supply level near the top of the previous trend. Note that we did not mark the entire level all the way to the top, we selected only the core Supply. Drilling into levels is explained in a separate article. The huge market reaction (drop) after the first return of price to the level is also visible. More experienced Supply and Demand traders probably also noticed the Demand speed-bump level in the middle of the strong upward move (not marked as a valid level here). This created only a minor reaction (seen on its right) and then failed quickly, most likely due to incorrect placement (Enhancer #2). There was also a Supply speed-bump level created by a Drop-Base-Drop move at the far right of the image, which is a valid level as far as Enhancer #1 is concerned.
A Demand level at the bottom of the previous trend (Drop-Base-Drop). The strong initial move as well as the subsequent market reaction can be seen during the first return of price.
Two Supply levels, one near the top of the previous trend and one created as a reaction to the first one, serving as a continuation pattern and protecting the initial trade.
In the above example we have a Supply speed-bump level near the top (Drop-Base-Drop) which produced a very strong market reaction when price returned to it for the first time. Two Demand levels can also be seen near the bottom, the second created as a reaction to the first one, thus weaker than the original level. It produced an acceptable reaction (despite the fact that a minor Supply speed-bump had formed above it near point A, so we can assume that the placement on the larger timeframes (Enhancer #2) was likely favoring Demand over Supply near those prices). Various other weaker levels can be seen, which produced minor reactions but not all might have been necessarily suitable for trading.
A Supply level can be seen on the left, at the top of the previous trend (Rally-Base-Drop). The initial move away from the level was satisfactory, and the level produced a sizable reaction despite the fact that price managed to move more than half way through the level. This reaction to the first level also created a second continuation Supply level marked on the right (which has its own strong initial move but should generally be considered weaker than the original level).
Here we have a Demand level on the left (Drop-Base-Rally), and a Supply speed-bump level (Drop-Base-Drop) which was formed on the way back to the Demand level. It allowed an acceptable distance (profit margin) from the Demand level, and both of the levels produced a reaction. The Demand level took two hits as a result (with the second one reaching deeper with the level), but still worked probably due to advantageous placement in the big picture, although we would have only traded the first return of price and not the second one.
On the left we can see a weak Supply level which produced a minor reaction (first return of price at point A) before breaking. The second time price returned soon after (at point B, when the level was then invalid), the level only managed to halt price (for around 10 candles) but without any reaction. The demand level (seen at the bottom) could have performed better (the gradual reaction is seen on the right) if a weak Supply speed-bump hadn't formed above it (point C) while price was returning to the level. Still, despite the slow reaction, which was far from ideal, the level eventually managed to produce a sizable reaction.
The first Supply level on the left (near the top of the previous trend) was hit in a very fast market move, which reversed quickly and produced a great reaction. This is more common around news releases, initially pushing towards the wrong direction and straight into a level (thus inviting all emotion based novice trades in the wrong direction), then quickly reversing after hitting the level where the proper low-risk high-reward entries are activated. During this first sizable reaction the price also created a second Supply level, which later served as a continuation pattern or could have been used as a new entry if the placement on the larger timeframes was optimal.
Stuff to remember:
Levels can be formed both near the tops and bottoms of trends, and within strong moves.
Levels can be formed on any timeframe, and they should be traded (if they are valid according to the Enhancer-based evaluation) on the timeframe that they can be seen most clearly. More about this in separate articles.
The levels that form in the middle of strong moves (i.e. rally-base-rally, or drop-base-drop) are called speed-bumps. They are equally important, i.e. their importance is based on how well they meet the Enhancer criteria, not their type or name.
Levels that look like the above examples might be seen anywhere on a chart but this does NOT mean they are all suitable for trading. We evaluate their suitability and their likelihood of producing a predictable reaction by using the Enhancers. Just because an area looks like a valid level it does not mean it fulfills the minimum requirements in order to provide stacked probabilities.
Additional levels might form during a reaction to another level. These have to be evaluated separately, but should generally be considered weaker or higher risk as some of the Supply/Demand imbalance has been satisfied (filled) at the initial level.
The whole idea is to identify and evaluate areas (levels) that have created Supply/Demand imbalances in the past and so are very likely to produce predictable market reactions in a statistically meaningful way in the future, in order for us to stack the probabilities on our side of the trade when price returns for the first time after the creation of the level.
The different types of levels with visual examples