Key Levels Indicator For MT5
Table Of Contents:
- Key Levels Indicator For MT5
- Why Key Levels Work
- How to Identify Key Levels on the Chart
- Key Levels Indicator for MT5
- Price Behavior around Key Levels
- Trading with Key Levels
- Key Levels and Money Management
Trading with support and resistance is a good method of approaching the financial markets. For newbie traders, this area of technical analysis is one that is fully understood. Known to many traders, support and resistance comes in various forms, including swing highs and swing lows, Fibonacci levels, trend lines, moving averages, Bollinger bands, pivot points and more.
However, there are key levels already existing in the markets that traders can use and find without employing complicated tools or custom indicators. These levels too can be strong support and resistance points. These price levels are widely known as psychological levels. In this article, they are simply called key levels.
Why Key Levels Work
Key levels are like magnets that draw the attention of traders. These levels are created by the collective psychology of market participants. In the foreign exchange market, these levels are shown as round numbers, which often act as support and resistance points.
It is not too difficult to understand why key levels work time and again. Humans value simplicity, and from the point of view of trading, this means trading around whole numbers. Traders frequently utilize whole numbers as entry and exit points. This trading disposition can affect order flow and hence price movement.
The following example illustrates how humans value simplicity in trading. If a trader considers selling EURUSD around 1.2080, he is likely to use a round number as entry price and the closest round number is 1.21. On the other hand, if the trader does sell at 1.2080, he is likely to place his stop loss at 1.21 or 1.22, whichever price he thinks will give the trade more room to breathe. This example shows the natural tendency of humans to use round numbers to find easier reference points for entry or exit.
Similarly, traders often use round numbers as profit targets. Continuing with the discussion in the foregoing paragraph, if the trader has shorted EURUSD at around 1.2080, he is likely to set a take profit target at 1.20 or 1.19. Again, the reason for this is the ease of using round numbers instead of working with lengthy decimal numbers such as 1.20132.
Another reason why key levels work is due to the attention given by huge companies and institutions to these levels. Several central banks set price ranges within which they would like they currencies to trade in. Oftentimes, when price gets to the lower or upper end of these price ranges, centrals banks tend to intervene, either directly or verbally.
How to Identify Key Levels on the Chart
Traders can easily plot the key levels on the chart using horizontal lines. This can be done by identifying prices on the chart that end in two zeros. If the price in the current symbol is expressed in five or three digits, the last zero is not considered.
In the above image, the horizontal lines in green mark the prices in EURUSD that end in two zeros (without including the last zero), that is, 1.1700, 1.1800, 1.1900, 1.2000, 1.2100, and 1.2200. Take note that these prices are 100 pips apart.
Other traders also take the middle number between the whole numbers into consideration. These middle numbers are called the “half numbers”. Like the double zeros, the half numbers also work very often. In the image above, the horizontal lines in gray are half numbers (without including the last zero), that is, 1.1750, 1.1850, 1.1950, 1.2050, and 1.2150. They are placed 50 pips above and below whole numbers.
Key Levels Indicator for MT5
The whole and half numbers shown in green and gray horizontal lines in the picture above are plotted automatically by the Key Levels Indicator for MT5. However, not all key levels are shown above for simplicity’s sake. The indicator can also show the 20 and 80 levels. See image below.
With this indicator, the trader can adjust the colors of the 00, 50, 20 and 80 levels according to his preference in the inputs tab. Using this tool obviates the need to manually draw the key levels on each chart of choice, and the user can change timeframes and symbols easily without problems. This tool is very useful indeed for anyone looking to use the concept of key levels in trading.
While it is not obvious to the trader, this indicator draws the horizontal lines as objects on the current chart, and the number of objects drawn can range from 500 to 1,000 or more. The user can look at this by pressing CTRL+B to show the Objects List and clicking List All. Anyone planning to automate his trading using an expert advisor can easily obtain values from these objects to be used as prices for entry or exit.
Price Behavior around Key Levels
The trader can easily see that congestion occurs around key levels on the chart as price moves up and down. We know that price tends to congest or stall first before reversing from an area of support or resistance. In the above visual, price rests on several occasions on the key levels on its way up in this hourly chart of EURUSD.
Regardless of the market condition, be it trending or ranging, key levels work well as support and resistance. If combined with the traditional approach to support and resistance, a profitable trading system can be developed by the trader. Of course, not all key levels work as support or resistance all the time, but many of these levels do, making them worthy of the trader’s attention.
Trading with Key Levels
The key levels can be useful to the trader in many ways. Traders can wait for price to touch these key levels and initiate a trade entry against the direction of price. This entry strategy is familiar to traders as fading the market. Obviously, this strategy will prove more effective if used alongside other technical analysis tools such as traditional support and resistance, Fibonacci levels, trend lines, etc. Entering the market with this method can give the trade the best entry price possible, and it is possible to use this strategy in line or against the trend as the trader prefers.
The above picture shows a great example of trading with confluence of multiple factors. As you can see, price is a few pips above the 1.9200 whole number, 200 EMA provides additional support, and the area aligns with previous resistance that was broken and turned into support. Opening a buy trade in this scenario would give the trade great prospects of winning. Price slowly reversed after touching the confluent zone and continued the initial uptrend.
Key Levels and Money Management
As previously discussed, key levels are not only good entry points into the market but are also useful in setting profit targets and defining the trade risk. When setting the stop loss of your trades, it is a good idea to give your trades some breathing room around whole or half numbers so that they are not closed prematurely, only to see price continue in your intended direction.
When setting the take profit objective of your trade, you should take note of the whole numbers ahead of the trade. This is because it is possible for price to reverse after hitting a whole number so you should not aim too much. The better strategy is to consider the potential take profit against the intended stop loss even before entering the trade so that it will be possible for you to realize a desired reward against the risk on the trade. If this is not possible, then you can pass on the trade.