Whatever your day-trading strategy there are key levels throughout any trading session that you absolutely must pay attention to if you are to be consistently successful. In this article we will briefly describe each one so that you can start using them in your own markets today.
Yesterdays High and Low
Many traders looking at the daily time frames will use strategies based on the high or low of a daily candle and this makes them significant for day-traders too.
Price will often start to stall as it approaches the high of the previous day providing the astute day-trader with the opportunity to exit a long trade or start to scale out and protect profit.
These levels are very easy to apply to your chart. At the end of the previous day or the start of the current trading session simply look at the previous day and draw a horizontal line at the session high and another at the low.
Overnight Range/Opening Range
The opening range is the difference between the high and low price set following the market open. For day traders in markets that have a fixed daily session, such as equities, this is often the first 30 minutes of trading.
The overnight range applies to those markets which can be traded 24 hours such as the Forex markets. As the main forex sessions start with the opening of the European/London markets we define the overnight range from the close of New York until the start of the European session around 3am EST.
You need to wait for your opening/overnight range to be complete before you can start to draw these in. As soon as you can, simply draw two horizontal lines at the high and low of the range.
This method works exceptionally well whether the overnight range is narrow or wide, wider ranges tend to contain price so suit reversals off the ranges better and narrow ranges tend to provide a stronger level of support/resistance once broken.
It takes seconds to draw these two horizontal lines on your chart each morning but is probably one of the more powerful methods described here.
Current Low and High of Day
Until the day is over you never know the actual high or low of the day but that doesn’t mean that we can’t make great use of what we know during the trading session.
The current low or high of the day is simply the highest or lowest price reached during the trading session up to the current point in time. Obviously price can still go higher or lower!
The real power of this approach becomes clear when you take into account the type of market that you are expecting that session.
If the broader market is in a strong trend then expect the most recent highs (bull trend) or lows (bear trend) to be broken more easily. In this case you want to focus on trading breakouts in the direction of the trend.
Where the broader market is ranging you should then expect the most recent highs and lows to be more reliable and hold. The only caveat here is that you need to see at least half of the average daily range put in first.
Average Daily Range
There’s really no magic here just the law of averages. If you calculate the average daily range (ADR) of any market over the previous month you will have a reasonable estimation of the likely range in the short-term.
As I just said, this isn’t magical and it certainly isn’t perfect as there will be some days when the range is tiny, and others where volatility drives the range off-the-scale. These should be exceptional and most of the time you should find that the range is about the daily average as measured over the last month.
The way that we use this is first to calculate the average daily range over the last month – there are various free tools out there to help you do this. Then we add half of this value to the opening price and that defines our upper boundary of where we think price is likely to end up, on average. We then subtract half of our average daily range value from the opening price and this sets the lower boundary of where we expect price to reach on average.
Note that very few lines of support and resistance are actually “lines” but areas of price, with this approach the lines are very much areas so some caution is required. We prefer to use these areas as probable targets for price to reach before losing momentum for the day.
Prior Weekly High and Low
The high and low from the previous week is often a strong level of support and resistance for the whole of the current week. The great thing about these two levels is that you place them once on your chart and they are valid for the rest of week.
The expected behaviour of these levels will be influenced to some degree by the relative range of the previous week.
If the weekly range was narrow then you should expect to see the levels breakout but then acting as support or resistance following the breakout.
If the previous weekly range was large then it will be more likely that price is contained and you should anticipate reversals from the levels.
As always with support and resistance levels nothing is ever certain. But I have never found a better way of stacking the odds in my favor than through the use of these key levels. Whatever trading strategy I choose to use I always look at the underlying market structure first to filter my trading decisions and help me decide when to get out.