How to Use Daily Levels to Find Entry Points, Stops, and Targets on Smaller Time Frame Charts

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7/24/17 – Today in the trading room, the moderator called a short signal for DKS. When I spoke to one of the traders after the market closed, he asked me why the moderator felt it was a good short and said it “triggered” by looking at the 5 minute. Before I answered the question, I asked the trader to help me with an exercise.

If you pull up the chart for DKS, try to find all of the levels on the chart where the tops of candle bars, bottoms of candle bars, opening levels of candle bars, and closing levels of candle bars meet. I drew a couple of them on the chart below in black. They seem to occur on the $2 levels, so at $62, $60, etc.

If you zoom in a little closer, repeat the exercise and you will see that they actually occur near the dollar levels, so $58, $57, etc.

Zoom in closer one more time and you see that some occur at the $0.50 levels, which are marked by the blue lines.

From the daily chart, we can see that there seem to be strong levels at the dollar marks where prices bounce off of those levels, or start and/or finish at those levels. We consider these strong support or resistance levels. The half dollar marks are notable levels as well. One could repeat this price by looking at weekly charts, 4 hour charts, etc. However, the way I trade, the daily levels are sufficient.

DKS gapped down this morning, so we were looking for a fade of the gap, a “gap-and-go” play, or a “check mark” play (all of these are Affinity Trading strategies). On the 5 minute chart, which is one I like to use for triggers, DKS faded the gap, which means it started to move against the daily gap caused by the closing price yesterday and the open price today. As you can see below, prices moved above the $36 level (a strong support/resistance level) and then consolidated between $36 and $36.5, which we identified on the daily chart as another notable level as well. The moderator saw this price action and said DKS is about to trigger to the downside. Once prices started to trade below $36 after they consolidated, the trigger was the break of the $36 level, which is noted by the arrow below. As you can see, prices never traded above the $36.5 level and eventually, fell back to the $35 level. With an entry right below $36, a stop right above $36.5, and a target around $35, you would get about a 2-to-1 reward/risk ratio, which is what we want to see when we take these trades.

 

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