The Ultimate Guide To Identify Areas Of High Interest In Any Market

The closest thing I’ve ever encountered to resemble the holy grail in trading comes down to the power of win rate, risk-reward, risk management, and selecting the right broker with a range of services to render tailored to your needs, period.

Perfection in trading is, therefore, nothing more than picking the right battles, at the right time (win rate), position yourself to gain the most ground in each victory that you claim (risk-reward) while calculating with precision the number of troops to deploy in each battle (risk management).

In this article, I am going to dissect the very critical component of how to choose the right battle to fight in your markets. This article should, therefore, be taken, at the readers’ discretion, as a Go-To guide to help you pick the areas of significance where decisions will be made, creating launching pads (opportunities) to move into new territories and advance ground.

Why static horizontal levels are so important?

As a result, they act as a magnet to attract and repel prices due to the liquidity pockets that resides near-by. Since every participant can spot these areas’ whereabouts with objectivity, it is precisely at these junctures where the larger share of stop placements will be found, which creates pools of liquidity, hence areas of interest worth fighting for.

Entering trades around areas of highly concentrated liquidity is absolutely essential for large institutions with a need to transact hundreds of millions of dollars on behalf of their clients or for purely speculative purposes. If large sums were to be transacted around thin liquid areas, as an analogy, large players would be shooting themselves on the foot by getting poor entries.

Why is that? Because the lack of counterparties to fill in their orders would lead to average entry prices that are far from ideal. That’s why major players are especially active around areas of high volume activity or liquidity.

That’s precisely why we hear the term manipulation or stop loss hunting so often. Because liquidity is the oxygen of every large player to have them involved at the size of trades they intend to. There is no better place for large players to get involved than in the areas this article will teach you to identify.

Why do we want to account for dynamic trend lines?

First of all, it’s a great visual representation of the type of trend at play and its dynamics. Are we trading with a very steep trendline? Is the trend developing with a less pronounced intensity? The angles of the trendline hold valuable information that one can use to their advantage to gauge market directions.

However, nothing comes close to the power a trendline has when combined with a level of horizontal support or resistance, as that communicates that a lot more eyes will be paying attention to the level. It also creates the phenomenon of confluence, in other words, the overlapping of different key levels around the same area.

How to identify & grade high-interest areas

Always start by zooming out the chart

One thing must be clear though. Drawing the right levels of horizontal support and resistance and trend lines is definitely more an art rather than an exact science. It takes screen time and training your eye. That said, anyway you slice it, it all starts from the very foundation of the ability to get enough data points of reference. By zooming out the chart, you can develop a much-needed eagle-view of a chart’s history.

Top-down analysis

What this translates into is that by identifying areas of high interest on higher time frames, it will invariably represent the opportunity by major players to find very large pockets of liquidity to fill in their orders at the best average prices before a resolution, which will involve a markup or markdown phase.

To limit the risk of suffering analysis paralysis, which is nothing else than an overdose of information, I’d personally wouldn’t suggest cross-checking more than 3 timeframes. I personally use the weekly and the daily to make a well-informed judgment of the context at play and place trades, while the hourly is the time frame where I used to concentrate most of my time and resources to find the trades in line with the direction dictated by the site in control on the higher time frames. Nowadays, with a demanding life and 2 young kids, I’ve gone up to spend an awful lot more time placing my trades on the daily.

Use different colors based on time frames

Number of tests

If trading with an existing trend, the creation of a unique point (swing high/low) from which a strong departure is seen, that by itself constitutes sufficient evidence that the next time the level is tested, it may hold relevance. As you will find out by reading this guide, the number of tests a level has is just one factor to account for.

There is much more to it that will determine the quality of static support and resistance, so for now, I command you to keep moving along. The bottom line: The number of tests for a level to become static support or resistance doesn’t need to be a minimum of 2 unless we are talking about trend lines, in which case, this rule of 2 does apply.

Find the highest interaction levels

If you think the market will concentrate pockets of significant liquidity at the horizontal levels represented by the close of the candles, you are right. If you think about the tail and beyond as a level rich in liquidity, you are also right as that’s where stops tend to be placed. You must account for both while understanding market auctions.

When you analyze a chart, what you see in front of you is nothing more than the representation of an auction process for that particular time frame. You could think of any market as an auction to sell a Picasso painting. The peculiarity is that participants are free to determine the fair value of the painting up and down until the close of the candle. If we were looking at the daily, the close of the candle at 5pm N.Y. time would, therefore, represent the price at which the market has agreed to transact the Picasso for. The tail also offers valuable information, as it tells us at what price level the market decided to reject the price.

My preference is to draw levels of support or resistance not based on market closes or the tails, but by identifying what levels have had the highest number of interactions. Remember, part of the success in picking the right battles is to identify the number of times a level has acted as a turning point in the past by assessing the number of interactions, that’s what we want to identify.

The more times an area is tested, if other boxes are also ticked, the more relevance it holds. It doesn’t matter if the area is drawn through the close or the tail of the candle, what is most important is the number of times the market has interacted with this level in the past.

With regards to trend lines, since it serves the secondary purpose of either finding confluence or as a mere visual representation of the trend, I am more inclined to draw the trendlines off the tails. I’ve never invested the time to get into the route of drawing trend lines through the candle closes as that would be, in my opinion, a less accurate way of representing the market dynamics, which should factor in highs/lows achieved.

Also note, I personally validate trend lines if they are in line with the dominant cycle. What this means is that the number of interactions is not what I base my decision on to draw a trend line, but whether or not it’s conducive with the underlying cycle in the time frame being studied. As long as the market continues to make respect a down cycle, a descending trendline can be applied, up until the moment we transition into a range.

It’s also worth noting that the 3rd touch of a trendline tends to hold significant relevance. Personally, whenever the context is right and I find a horizontal level of interest that happens to intersect with the 3rd touch of a trend line, more often than note, I know this level represents an opportunity to find trades on the confluence found.

Type of rejection & what it achieves

However, that’s just half the equation. The impulsive departure is one aspect that adds credence to the level, the second one to ask yourself is how much ground did the creation of this static horizontal level gain?

In the example below, the price made it all the way back down to retest the previous swing low, which is a good enough outcome. Have a look at the second chart below where I classify the type of moves away from a level and how they may be graded.

Similarly, if a level that used to be support now turns resistance or vice versa, how can we grade it? The answer lies on the same concepts, that is, the velocity of the breakout and extension. The first test of the backside of a level tends to be the most powerful as it’s that first test that still occurs within the context of a developing trend and supportive market structure. The more times the level is tested, the more dubious the market structure becomes and the more we exhaust the liquidity at that level. Find an example below.

Here is a trick for you. Above, I suggested using different colors based on timeframes. You could take it even further by drawing lines of support and resistance depending on the quality of the level. If it’s a +++ or high quality, you could use a thick line, if it’s still solid but fails to break into new highs/lows (++), a dash line could be used as reference, while a dotted line could be the line you draw if the level happens to be low quality (+).

Recent information

Cluster of levels

Market structure

We should interpret the term context as to whether or not the market structure is favorable for a potential rejection of the level or does the current cycle heightens the risk of the level fails to hold.

Find below an example where the resistance is highly graded yet the market structure is no longer in our favor.

I wrote quite extensively about how important it is to engage at these levels with the structure in favor. You can find my article on How to trade off liquidity levels following a structure breakout.

If you also want to find out all there is to know about my approach to read market structures, then make sure you read this tutorial on How to read market structures in Forex.

When to consider a level broken

If you are looking for even further evidence, you could find it by seeing that the market is now treating the former resistance as new support or vice versa. That should be the ultimate clue. I will be using the same chart example above to help you understand this concept.

Your entry trigger around decision levels

Create a checklist

The checklist should be short, very concise, such as the example below:

Top-down, Zoom out, Interactions, Identify levels, Recent info, Credence level. Structure/Cycles, Confluence

Putting it all together

To finalize, I will present the end result of what the EUR/USD chart would look like based on all the criteria that I have introduced in this tutorial. Since it will probably be a lot to take, I’ve also taken the time to make an educational video where I walk you, step by step, how I selected all the levels.

Video Presentation

Global Prime is a Forex and CFD provider specialising in low latency connectivity to tier-1 bank liquidity/ECNs https://www.globalprime.com