Maybe you have heard or read about these little helpers in charts and you did not know how to identify them. Or perhaps you do know exactly what they are, and the importance of them. Either way, let’s take a look at how those price levels work and why they can be helpful.
It is obvious that you cannot expect history to predict the future of chart progress. However, if you learn to read important levels of how prices reacted somewhere in the past, you will see that it is possible that it will react to them again. Below is a good example of that on an actual oil chart which is extraordinarily volatile these days.
Do not take these price levels for granted, an instrument can break them anytime (especially oil) and can continue far past them. It is useful to know that price levels do not sit on one exact price. For example, if you take a look at the picture above, you can see the range of support and resistance, where the market can make a turn.
Using these price levels are simple, imagine that you are a trader who is waiting for the right time to make the trade. You will probably never catch the market at the exact turning point, but with price levels in the chart, you can be really close to it. As soon as the market visibly turns on one of your price levels, you will have one more signal for a successful trade and you can just set a frame for the chart reading.
You can also use the price levels to manage your risk and reward ratio, let’s say that we can see the support on 52USD on the picture, and somewhere between 57-58USD, the resistance. If you place your trade now, the stop loss would take place somewhere around the 52USD price level. In the event that the market breaches that level, you will take the minimal loss. Additionally, if you look at the trade you are risking 1USD (if the stop loss is at 51USD) to 5USD (if the take-profit is on 57USD) I think those odds are fine!
-Written by Wade Rolson