The following article aims to provide:
- Information about why smaller levels can frequently be stronger than larger levels
- The reasons why gigantic ultra-fast market reactions can sometimes produce weaker levels than expected
- The reasons why picture-perfect levels can sometimes be harder to trade, or can sometimes be weaker than the less obvious ones
If we said that smaller levels can frequently be stronger than larger levels, then it would sound counter-intuitive to most people, especially those used to reading their local bookstore's trading textbooks. And when we say that by "smaller" we do NOT mean their height (i.e. thickness) but their horizontal width (i.e. the time it took for the level to be created), then even more question-marks appear. In the case of their height (thickness) the reasons are more self-explanatory and have already been discussed, thicker levels require risking more pips for the same reward, or alternatively require drilling into the level (discussed elsewhere), while thinner levels offer a more concentrated imbalance of orders. But what about their width? Shouldn't larger levels with larger width be stronger, due to containing more trading time and/or activity, i.e. exactly as most "wise" trading books suggest?
The counter-intuitive but correct answer is no, and the reason is because the bigger the imbalance between Supply and Demand, the less time price stays at any specific area. This is the only outcome that is mathematically possible, it is not some kind of guesswork or wishful thinking. If price stays too long in an area then there can't be a great deal of imbalance there, otherwise one of the two sides would have been exhausted quite easily and price would have run away, far and fast. But despite mentioning this here, we have to say that you will probably find it quite hard to generate actionable information directly from this.
The bigger the imbalance between Supply and Demand, the less time price stays at any specific area
One reason is that time (i.e. number of candles) is quite subjective because what looks like a big-width level will actually be a much smaller width level on a higher timeframe, which might even be the "natural" timeframe for trading the level (so if you got the natural timeframe wrong it can lead you to the wrong conclusion about the level). Another reason is that price can stay for quite sometime in a temporarily balanced area but then run away due to a newly generated imbalance. This is not rare and in such cases small levels at the side of another large and initially balanced area can look like a single level when in reality they are not, and so it can take some experience in order to distinguish between different scenarios. The important thing to keep from all the above is that you should not underestimate that small level (or probably even smaller speed-bump level) that you identified, if it is valid it can be stronger than you think. Evaluate it and if it is correctly placed, has sufficient profit margin, and you trade the first return of price to the level, it can easily provide the probability-stacking setup we are aiming for as Supply and Demand traders.
Do not underestimate that small level (or probably even smaller speed-bump level) that you identified, it can be stronger than you think
Another counter-intuitive thing to have in mind is that those rare gigantic and ultra-fast moves (that almost always are news related), can leave behind levels that end up being much weaker than you would normally expect. Even as Enhancer #1 suggests we are normally looking for the strong moves, so why are these specific extreme cases worse than expected? The thing with those cases where you might see a super-fast move, like a 300-400 pip reaction in an hour or two on a major pair, is that it might create a one-time interest, i.e. many professionals will just skip this level next time due to being too unpredictable or too obvious. Yes, the most obvious levels can sometimes start behaving erratically, and there are reasons for this (more on this below).
The other even more important reason, is that due to its size the move will naturally be visible even on the daily or weekly timeframes. This means that although on a much lower timeframe the beginning of the move might appear to have left behind a valid level, the natural timeframe for this level will end up being the much larger daily or weekly timeframe, meaning the size (thickness) of the level, the expected entry, the minimum stop required and the calculated profit margin, and anything else related to the level will be different than originally expected, and most likely totally irrelevant to you unless you are into "position trading" and you like to keep your trades open for weeks or months.
So, to make a long story short, stronger initial moves are generally better, but up to a point. Be careful not to use a smaller timeframe for a huge move because it might be the wrong timeframe for the level. We know that larger timeframes have thicker levels, require smaller trade size due to distant stops and much longer waiting times. But if you don't like this specific trade then you can skip it completely and look for another trade, don't trade it incorrectly just because you don't like it!
Be careful not to use a smaller timeframe for a huge move, it might be the wrong timeframe for the level
Now to explain the other counter-intuitive thing, why picture-perfect levels can sometimes become harder to trade, or why they can sometimes be weaker than the less-obvious levels. The main reason is simply competition. Not everyone can be right at the same time, and not everyone can make money at the same time. Forex is a zero-sum game and so it naturally requires two opposing sides that "disagree" actively by putting their money on the table. Despite the fact that Supply and Demand trading is not so common outside professional circles, picture-perfect levels can sometimes create a not-so-ideal situation for banks and institutions that prefer everyone else to be "on the other side of the trade" near valid levels (so that everyone then runs behind them after the fact, as usual).
So the picture-perfect levels can sometimes cause the big players to really put the levels to the test by creating increased and "unexpected" volatility and hitting the levels multiple times in a very short period of time. This is generally a problem simply because we want to be trading the first return of price to the level. Excessive volatility can cause early exits (i.e. shaking off the "weak money"), or forces us to use all our experience in order to decide whether this is all part of the same real move, i.e. still the first return of price and nothing more. It can be one of the harder things to master initially just because the new trader will always see the obvious setups first, where occasionally (although not too frequently), harder-than-average trades will unfold. Not to worry though, Supply and Demand trading gets better by the week for the vast majority of traders that learn how to use it, as long as they stop mixing it with indicators, oscillators and other arbitrary decision-making tools, and learn to focus on what's real in the markets.