Trading the Key Levels
Retest of the Key Level
1. Trading with the trend -(#1 in the previous example because according to my track record this is the more consistent way of using levels - without fighting the trend) – When trading with the trend, the market will often reject or pause on the way through the key area(this rejection creates a strong temptation and sometimes opportunity to trade against the trend, but that is the more risky of the 2 trades). You may want to consider this rejection as extra confirmation that your level is still holding. Using a key level as a retest in the direction of the trend is a situation often overlooked by the novice trader. Here is an example of a retest of the key level.
Definition of Retest per Investopedia
The goal in trading key levels with the trend is to be able to match up the PSR foundation of finding a trend, pullback, and turnaround with the levels of support and resistance; AND to use the correct risk management strategy.
The Pullback/ABC/123 turnaround trading methodology is a great foundation to build on. If you don't have a foundation for your trading, consider building your own zone via Trader Creator and, in time, with your charts. You will be able to add blocks to your foundation and continue building on what you already know.
2. Trading a key level as a reversal:
Trading a reversal (trading against the trend), I believe, is the expectation most traders have when they think of support/resistance, but this can be a dangerous way to trade. Understanding when to trade against a trend is a longer process than learning to trade with the direction the market wants to go (the trend). Trading against the trend from a foundational standpoint is risky without a certain level of awareness on the charts. I strongly recommend extra practice before trading live money if your goal is to use key levels in this manner. Having a set of criteria (rules) that says “I only trade against the trend if ----” is highly recommended.
Quick example of trading against a trend using a key level from the daily chart combined with a ruleset that requires confirmation of a turnaround at the key level.
Full transparency- trades shown are from my live account to show a level of trust in a trade zone that FNL and myself are willing to share with our traders. Don’t assume any examples as truth- prove your own trading system and ruleset to yourself over time by repeating decisions and testing them.
In this last example, I had a channel drawn from the 4-hour chart already showing support - which acted as a strong point of confluence at the key level.
4hr channel- trade area marked in green
A common downfall for traders revolves around wanting to take every opportunity at key levels to trade against a good trend.
In order to help understand how I personally trade these levels, I will share a short set of guidelines I’ve typed out for myself (paraphrased on my charts). These guidelines help me to stay within my zone on a few different types of trades that I take. They are as follows-
Trade I'm looking for is-
1. With trend (typically on the same side of 89 and 200 EMA).
2. 30-70% retracement of previous price action
3. FNL Diamond/123 turnaround (same thing) OR
4. Double Bar (DB) from the edge of a channel, EMA, or key level (identified before the trade)
Execution using either #3 or #4
5. Clear stop at close of signal candle and enter, or set Limit Order (LO) between the point at which the stop clears and close to the key level.
Execution charts- 5-min
(will note whether key level is with or against trend per trade)
Example 1. Below is a daily chart. Starting at the most recent level - Purple - we can already see this level was respected when we returned here the 2nd time, but let's look in hindsight at what happened from a 5 minute execution chart and discuss how this level could have been traded.
The first time we hit this lowest level of support was the 8th/9th day of the month (level drawn bodies to wicks)- let’s look at what happened when we returned there on the 15th.
Above is a 5 minute chart with the same key level as shown in the daily chart above.
My own view-(all hypothetical- I don’t like to use hindsight in my trading, unless I can discuss exactly why other traders could recreate this trade for themselves.
As the market approached the level initially around 3:30, I would have been hesitant to fight the downward momentum of the market. But, after seeing a strong push upward on its way out of the zone, I may have had more faith that this level would hold again (still no trade yet). Note that drawing bodies to wicks as a support level at 3:15, after the confirmation of the turnaround, would have given you a great entry LONG; but you must decide for yourself if that trade is worth taking over time (trading against the trend).
The best 2 chances I see to get into a trade here would be:
1. (Against Trend)- The market presented a very clean DB (down then up candle confirming turnaround) off the very bottom of the range between 5 and 5:30. This entry would be either at the green candle close with a clear stop; OR, if stop is not clear, set a limit order between the close of the green and the bottom of the support box at a price you’d have a clear stop. (Understand the further away you set your LO, the less likely it is to be picked up).
2. (Against longer-term trend but with a short-term Higher High out of support range)- The market, as expected, used the bottom of the box as a support level and crawled back out the top. Then the market showed a retracement and turnaround at 6:00, not only to retest the top of the box, but also to the 21 EMA which is already showing signs of support. You have a clean DB off the 21 EMA and an FNL Diamond showing a turnaround in the upward direction. With a clear stop, entering this trade at any point after the first green candle (showing a DB that closed off the key level and 21 EMA simultaneously) would have fit my rules.
I prefer trade 2 over trade 1 in this case because the market is showing more confirmation that the level wants to hold in the direction of a shorter-term move off of the key level.
I usually set my limit order at or just past where my stop would clear a turnaround for a trade to have my best shot at entering the trade with a clear stop. Too often in the past, I’d set my LO too far away and miss a trade that was worth taking- and I would miss a position that, according to a repeatable system, I know I should have taken. This still happens where I miss a trade every now and then, but much less often than when I was chasing the ‘perfect’ position.
There is a balance between position and direction. How good of a price position can I enter at (and when) to still be sure the market is turning and going in my direction? Sometimes the market runs away from your desired position too quickly before this confirmation is set. Knowing where you want your trade to take place is only half the battle; the final decisions before an entry may revolve around waiting on the confirmation that the market is indeed turning and doing what you want at your key level.
A great trader once said- “If you aren’t missing trades, then you aren’t being patient enough.”
Example 2: Below portrays how multiple levels interacted together over time.
Example above is a stretch of the market after both levels were previously drawn. The red box from October, and the green from early Feb are marked with blue circles. Next is a look at how the levels were respected in early March (orange).
Notice in the next image how heavy each box acts as a support/resistance level. Also look for retests where the market uses what was support as resistance or vice versa. You might visualize with the phrase ‘a floor becomes a ceiling’, or ‘the ceiling becomes the floor’ in later price action.
KEY TAKEAWAY - If you wait for a DB or FNL diamond turnaround from the key level and clear your stop, then the odds of filling your trade with a reasonable gain increase significantly versus not waiting for confirmation at the key level.
Combining situational awareness (trends and strength of levels) with the patience to wait on confirmation of a turnaround from your key level can create a strong tool in your trading toolbelt.
Question- My favorite trade areas are marked with a yellow circle. Why might I prefer these areas over others the market is also respecting?
Answer- the areas marked in yellow are either in the direction of the trend, or a continuation of a previous move that has already respected the key level.
1st section zoomed in to see candlestick patterns (Mar 1st-2nd)
2nd section zoomed in to see candlestick patterns (Mar 4th-7th)
The same support/resistance level concepts can be applied from the 5-min.
A couple examples of my Trades from a 5-min chart - key level- drawn/used the same way as demonstrated on the daily levels
Trade 1 - Feb 14, 2022 key level established on bottom between 4:00 and 5:00AM.
Trade 1 Feb 14 with notes
14:15 LO set at 4364.50 upon FNL diamond confirming the turnaround at the key level.
14:16 B 4364.50 S 4376.50. P12S8. Result +12 points
Trade filled in approx. 10 min. Stop clear. Plenty of headroom for profit.
This trade was against the trend, but the market was very stretched to that level and I took the trade after confirmation of the turnaround with a clear stop.
Trade 2. Key level established Feb 11(Fri) before 1600. Picture 1
Trade Feb 14th(Monday) Picture 2
Picture 2 below
This trade had a turnaround off the 89 EMA and a key support level, during a retracement, after the market was showing a strong upward push from a previous support zone (uptrend). Confirmation of turnaround and entry greenlight were set by the FNL diamond at the key level.
LO set where the stop clears from the key level.
Try setting Limit orders where your stop clears the turnaround confirmation at a key level to see if this will work for you, and over time I bet you will have similar experiences. Or, maybe you decide over time, this isn’t what you want because you miss too many good trades. Only YOU can make this decision.
My recommendation is to build a repeatable pattern around YOUR trading.
Trading from key levels has helped many FNL traders, myself included, to improve on their trading percentage and overall confidence. Understanding why a key level with a turnaround signal is a more-dependable trade because you are waiting for the market to confirm your level is vital to trading key levels; compared to assuming the key level will hold because you have drawn it and don’t yet have the market’s confirmation.
Some levels may be strong enough that you don’t rely on a turnaround signal, but I will leave that for you to decide for yourself with time, practice, and eventually the understanding of a riskier decision. Also, trading in the direction of the trend can lead to higher levels of success in the markets, as opposed to fighting the direction the market is trying to go. Many algorithms and larger traders are trading heavily in the direction of most good trends; fighting this current can prove difficult and less predictable at times- leaving you feeling as if your strategy/trading is struggling.
Going further than the entry-
Using key levels to define headroom and an exit before taking a trade can be just as important as knowing where to enter the trade itself. Key levels of support/resistance can show ahead of time where the market is likely to turn around in a move. The flipside of the same coin is understanding that markets often break key levels in the direction of the trend. A strong trend might break a key level without much resistance, but a weaker trend often turns on the exact quarter tick of where the level has been drawn.
Having to predict which outcome will occur for a trade can be entirely avoided at times. Setting up your position upon entry to hit your fill before testing a key level can increase the win percentage of your trades.
From the author-
At the end of the day I want to help anyone I am able to improve at trading with concepts that have helped me over my years as a futures trader, but don’t take my word for anything. I don’t speak from a podium or claim excellence over anyone. My goal is to lay out a trading strategy that someone can prove or disprove for themselves by taking the concepts presented, practicing on sim/playbacks, then refining his or her own rules for the trade. No two traders will trade exactly alike over time. The more confident you are that you're following your own rules, the more likely you’ll trust your trade with confidence and not mind waiting on the results of your risk-management plan to play out.
I do not set rules for anyone, nor am I responsible for anyone else’s trading.
Thank you for your time
FNL Presenter and Trader