The levels worth marking

There are only a handful of level types that a beginner needs. Each one corresponds to a specific group of traders with a specific reason to act. If you can name the group, the level is worth marking. If you cannot, it is a line.

1. Swing highs and swing lows

The most important kind. A swing high is where a rally ended; whoever bought there is trapped and the level is the top of their pain. A swing low is where a drop ended; whoever sold there is trapped. You already know how to find these from Module 3.

The bigger the timeframe of the swing and the sharper the reversal, the stronger the level. A weekly swing high with a long wick beats a five-minute swing high every time.

2. Prior day high and low

For anyone trading intraday, the previous session's high and low are the two most-watched prices in the market. Every day trader knows them. Many algorithms reference them. When price approaches yesterday's high, traders who sold there yesterday are watching, traders who want to buy a breakout are watching, and traders who want to fade the breakout are watching. That crowding is what makes the level matter.

 Yesterday                 Today

 PDH  --------|--------------------------------------------
              |                                  |
            +---+                              +---+  <- reaction at PDH
            |   |   |                        +---+ |
          +---+ | +---+                    +---+   +---+
          |   | +---+ |         |        +---+
        +---+         |       +---+    +---+
        |   |       +---+   +---+ |  +---+
 PDL  --+---+-------|---|---|-----+--+------------------
        |           +---+   |
                            |

Also useful and closely related: the prior week high and low, and the current day's opening price. Each is a price a large number of people are looking at simultaneously.

3. Round numbers

Prices ending in 00 or 50 attract orders because humans think in round numbers. A trader deciding where to place a limit order tends to pick 100.00 rather than 99.73. Stops cluster just beyond round numbers for the same reason. The effect is strongest at big round numbers (a stock crossing 100, an index at 5000, a currency pair at 1.2000) and weaker at small ones.

Round numbers are not levels in the same sense as swing points, because no one is trapped there by prior price action. They are levels because everyone agrees to pay attention to them. That is enough to make them worth noting, and they are strongest when they coincide with another level type.

4. Consolidation edges

When price ranges for a while, the top and bottom of that range become levels. The reasoning is the same as swing points, multiplied: instead of one group of trapped traders at one swing, there are several groups at several swings clustered around the same price. Range edges are among the most reliable levels precisely because they have been tested more than once.

The middle of a consolidation area, where the most candles overlapped, is also worth a glance. That is where the most shares changed hands. When price returns there after leaving, a lot of traders have a position from that area.

5. Gaps

A gap is a space on the chart where no trades happened, usually because price opened far from the previous close after news. The edges of a gap act as levels because a large number of traders got a position at the gap price without a chance to act at the prices inside it. Price often returns to "fill" gaps, which is really just price returning to where the unfilled orders were left.

A table for quick reference

Confluence

When two or more level types land in the same zone, the zone is stronger than either alone, because two different groups of traders have a reason to act there. A prior day high that is also a round number that is also a daily swing high is a level to plan around. A lone five-minute swing low is not.

Confluence is also a filter. If you are only allowed to mark levels with at least two reasons behind them, your chart stays clean, which is the subject of Lesson 4.

Key idea: Mark a level only when you can name the group of traders waiting there. Swing points, range edges, prior day high and low, round numbers and gap edges each correspond to a real group. When two coincide, the level is stronger.

A worked chart

A stock's daily data, summarized:

• Six weeks ago, a weekly swing high at 52.40 with a long upper wick.
• Three weeks in a range between 47.80 and 50.20.
• Yesterday's high 50.10, low 48.60.
• Round number 50.00.

The zone from 50.00 to 50.40 has four reasons: range ceiling, prior day high, round number, and it is on the way to the old swing high. That is a level. The old swing high at 52.40 is a second, separate level. The range floor around 47.80 is a third. That is three zones on the chart, and that is enough for a day's planning.

Try it: Open a daily chart and mark exactly three levels: the most obvious swing high, the most obvious swing low, and one range edge or gap. For each, write which group of traders is waiting there. If you cannot write it, remove the level.

Recap

• Swing highs and lows are the primary level type; higher timeframe and sharper reversal means stronger.
• Prior day high and low are the most-watched intraday levels.
• Round numbers matter because everyone watches them, not because anyone is trapped.
• Range edges and gap edges collect multiple groups of waiting orders.
• Confluence, two or more reasons in one zone, is both a strength signal and a filter for keeping your chart clean.