Today I want to spend a little bit of time explaining why recent technical levels are far more important than old technical levels.
Most of the analysis forex traders conduct on the market use old technical levels to determine which direction the market is likely to move in, this is the wrong way to carry out analysis. What is happening right now is far more important than what has happened in the past, the past is meaningless unless something can be proved to have happened which could affect future price movement. A good example would be traders trapped in losing trades.
We can find out where large numbers of retail traders are trapped in losing positions by looking at Oanda’s open positions graph, if we see there is a percentage of traders still in losing trades which they placed a week or two ago then we know for sure that something which happened in the past could have an effect on the future, as when the market comes back to the point where these traders entered their trades its likely they’ll close, thus causing a possible price change.
Essentially all levels are in the past once they have been created, but there is a difference between a level which formed today and a level which formed 3 weeks ago, for example a supply zone which appeared today is far more important than a supply zone created last week.
The Problem With The Past
There is only one way for the market price to move.
People must make a trading decision which will put either a buy or sell order into the market.
The bank traders are the ones who move the market, they will always be reacting to what other traders are doing, all of the decisions they make depend on the current state of orders coming into the market. None of their trading strategies are based on using past price points or levels to place trades, their entire focus is on “how many orders are coming into the market”, and “what decisions can we make using these orders”?
Retail traders do not make decisions based on the orders coming into the market mainly because there isn’t any way for them to actually see the orders on their charts, if they can’t see the orders then the only other method they can use to carry out analysis is past technical levels.
If you ask a trader which part of the chart he spends most of his time looking at when carrying out market analysis I would expect his answer to be the left hand side. The right hand side is only really viewed when the trader wants to find and entry into his trade using candlesticks patterns such as pin bars and engulfing candles.
If traders stopped focusing on the left hand side of the chart and started analyzing what is happening on the right side of the chart I’m sure they would be able to make more money as they would be reacting to what is taking place right now instead of what took place a few days/weeks/years ago.
Recent Swings Highs/Lows Vs Old Swing Highs/Lows
For most traders swing lows and swing highs are primarily used as a way to determine current trend direction, for a lot of traders though swing highs and lows are used for other purposes such as a place to put their stop-loss or a pending order in anticipation of a breakout taking place.
As time passes and newer swing highs and lows have formed, the older swing high and swing lows will become less significant as the traders who may have had their stops placed at the swings move them to new levels and the breakout traders who had orders placed at swings decide to trade newer swings which have developed in the market.
Look at the two swing highs marked in the above image….
Imagine for a minute that the market had only moved to the point where I’ve placed vertical blue line, so you couldn’t see any of the candlesticks after the blue line and the only levels you could go off were the two swing highs I’ve marked 1. and 2.
Most traders would look at this and see no difference between the highs, for the traders both swing highs are the same only one is higher than the other.
When I look at the two swings I know the high marked with a 2. is far more significant in the market than the high marked with a 1.
The reason being is the second swing high would have contained breakout traders who have been entered into long positions when the high was broken, which means we know there are traders present in the market with trades open from the high, if the market begins moving back towards the high these traders could decide to close their trades, causing a price movement back in the direction of which the high was broken.
Now in the first swing high I’ve marked there is unlikely to be any traders in open trades because of how long the market has been away from the swing high.
By the time the price has reached the second swing high the market has been away from the first swing high for 15 hours, its highly unlikely a large number of traders will have held onto their trades for such a long time especially with the market moving such a large distance over the course of those 15 hours, therefore this swing high is now irrelevant to us as we know there probably isn’t any traders left in their trades to cause a price change.
Recent highs and lows are far more likely to contain pending orders than old highs or lows due to traders seeing them as being closer to the current price, pending orders whether they are pending orders to buy/sell or stop losses, have the potential to cause a price change in the market and are most often placed at the most recent swing high or low.
The closer the swing low or high is to the current market price the more relevant it will be to traders in the market.
Recent Supply And Demand Zones Vs Old Supply And Demand Zones
Supply and demand zones are another technical level which decrease in their significance as time passes.
The funny thing is the supply and demand method taught by most online gurus state the longer the market has been away from the zone the better chance the zone has of causing a reversal upon the price returning to it. I’ve spoken about this in more detail in my supply and demand article but I’m going to retaliate some additional points which I failed to include in the previous article.
One of the primary requirements of a supply and demand zone is the retail traders who are either buying or selling on the arrival into the zone. These traders will contribute the orders needed by the banks to place their trades at the supply and demand zone. When a zone is not hit, and the market moves away for a long time, it means the banks didn’t actually have trades they needed to place at the zone, if they did then the market would have tested it soon after it formed and their trades would have been placed.
When the market has been away from a zone for a long time the market environment changes, the objectives of the banks also change to accommodate for these changes. So when a supply and demand zone is revisited after the market price has been away from it for a long time the banks don’t place any trades at the zone because the whole structure of the market has changed.
Here’s a supply zone which appeared on the 1 hour chart of AUD/USD
When this supply formed AUD/USD was in a steep decline, as time passes the decline stops and the price begins to advance higher. Now the market environment has changed completely, before the market was falling now its rising therefore the banks aren’t interested in this zone anymore because the whole trend has changed.
The only reason the banks would have wanted to use this zone when it was initially created was get more sell trades placed in the direction of the then downtrend, now the downtrend has ended there is no reason for them to place sell trades, which means they have no use for the zone anymore and when the price hits the zone the market does not fall lower.
Recent technical levels will always be more important in determining which direction the price is likely to move in than old technical levels.
If you focus on old levels you are essentially acting like a human indicator because you’re lagging behind the new developments which will have far more importance on where the market is going to move than the things which have happened in the past, recent swing highs and lows are the perfect example of this.
I think a large part of the problem as to why traders focus on past levels so much is the spread of disinformation by people who don’t know how to trade, Sam Seiden is the main supply and demand teacher on the web yet a lot of the things he says about supply and demand zones are flat-out wrong and lots of traders lose money because of the information he provides.
At the end of the day I think traders would do a lot better if they spend more time focusing on recent events rather than old events, a good way to practice this is by only marking technical levels which have formed over the past week and making all of your trading decisions based on these levels only, try it out for a while and see if you make more money than you did from trading older technical levels.