Two of the key features of a price chart that are critical to any price action trader are support and resistance levels and price action event zones.
You are probably more familiar with "levels of support and resistance" as these are one of the more basic technical analysis concepts and are fairly easy to understand.
Price promotion event zones (also called event areas) are something I came up with years ago, so you may be a little less familiar with them. However, they are as important as standard areas of support and resistance, if not more.
In today's lesson, I wanted to take some time to teach you these two pieces of the technical analysis puzzle and to help you distinguish between them.
An elephant never forgets, the market either …
Elephants are said to have one of the best memories in the animal kingdom. The market also has an astonishing “memory” in that key turning points on a price chart tend to work out levels and zones that will remain relevant for months and years to come.
How many times have you seen a market turnaround, practically in an instant, and then you've narrowed the chart down and found that the same level was an important turning point a few years ago? These are the types of price promotions we need to learn to follow and use.
While I have already written an article on event areas entitled "The market never forgets", I would like to repeat exactly what these important areas in the table are …
An event area (or zone) is a significant horizontal area on the chart in which an obvious price action signal has formed OR from which a massive directional movement (up or down) has been triggered (e.g. a massive breakout in the lateral trading range) . You can and should imagine these event zones as “hot spots” on the map. An important area on a chart that we should continue to monitor closely if the price goes down in the future. We assume that the next time / when the price revisits these event zones, the market will pause at least and think about whether it will reverse direction or not.
- Event zones are key price action signal areas or key breakout zones at key level or consolidation.
- Support and resistance levels are apparent horizontal levels drawn on a graph connecting bar highs or lows that are at or near the same price level. These values can remain relevant in the graph for days, weeks, or years, but overall are less significant than price action event zones. For more information on drawing support and resistance levels, see my tutorial.
Price action event areas
As explained above, a price action event area remains relevant even after it has been created. When a market comes back and tests these areas again, they offer a "hot spot" and a good opportunity area to look for a second chance entry. So don't worry if you missed the original move from the event area. There is usually another opportunity in an event zone and the market will be there tomorrow. Do not forget!
Large and significant events / movements in the price charts are remembered and other professional traders know this. These past event zones often become self-fulfilling turning points simply because so many other retailers expect the price to turn there and are already waiting to buy or sell from them.
Let's look at some example diagrams …
The easiest way to understand a "price action event area" may be a clear and distinctive event, e.g. B. a pin bar signal. If an obvious price action signal forms and the price follows the signal and makes a strong move, you now have an event area at the level / area of signal formation.
An important point to remember is that you don't have to worry if you miss the original event train! You can often get a second chance simply by waiting for the price to return to the same event area. You don't even need a confirmation signal for the price action on the return. You can enter an existing event area blindly. However, if you get another clear price action signal on the return, as in the example table below, it's even better!
The event area, which can be seen in gold below to 1305.00, was solidified by both a signal and an outbreak. Notice the first pin bar signal on the chart just above this level, then the price eventually collapsed to 1305.00 and broke out, further suggesting that this level was a strong event level.
In the next example of an event area, we look at the S&P 500-day chart. Note that after a strong downtrend in early February, some long-tailed bullish reversal bars have formed, leading to a strong uptrend. The event zone was forged at this time. We can now view this area as a “hot spot” on the chart to see when the price falls again.
Notice the pin-bar buy signal that formed after pulling back into this event zone. This was an almost picture perfect buy signal as we had the confluence of the event zone as well as a precisely defined signal.
Support and resistance levels
Support and resistance levels are simply horizontal levels on the graph that can be dragged across bar highs and lows. There can be many levels of support and resistance in a chart, so we mainly pay attention to the more important ones.
I've written several tutorials on how to draw support and resistance levels and how professionals draw support and resistance levels.
In the following example, note that there is no obvious price action signal and no strong breakout from consolidation or level. These levels are just standard support and resistance levels that are pulled above bar highs and lows.
There are usually many more standard support and resistance levels than event zones in a diagram, even in a daily / higher time frame. The main point to understand this is that event zones are more important because they reflect an important price event, while levels of support and resistance can be pulled across smaller market turning points, which are usually less significant. See example below for standard support and resistance levels.
What are the main differences between the two?
The difference between an event zone and standard support and resistance level or range may seem subtle, but there is a difference.
The easiest way would be, every event zone is also a support or resistance level / resistance area, but not every support and resistance level is an event zone.
This is how you can differentiate the two …
An event zone must either have a price action signal that has caused a big move, or a major price breakout from a consolidation area or level. Let's take a look at some diagram examples to show this more clearly:
Below we see a clear example of an event zone. It was an event zone because:
- It was the area on the map where a major eruption occurred. Note the long consolidation area before the breakout. When this outbreak finally occurred, it was a strong price action event. This level on the EURUSD chart is likely to remain relevant in the future.
Next we see a clear example of support and resistance levels, which are shown in a diagram. These are not event areas because:
- There was no long consolidation before an outbreak.
- There was no strong / lively price action signal that triggered a strong move from these levels.
Event zones and support / resistance levels help define trade risk
Another important feature and benefit of event zones, support and resistance levels is that they help us define our risk for a trade. In particular, they help us determine where we place our stop losses and how we know when the market invalidated our trading idea.
Of course, you can place a stop loss directly above a support or resistance level, because if the price hurts that level, you think the market is changing and your original trading idea is probably not working anymore.
An event zone is therefore often a more important area of support / resistance It is an even better barometer of trading risk as a standard level. When a market passes an event zone, you know that your trading idea is not working and market sentiment is changing significantly.
If you have a clear price action signal / pattern in an event zone, you can fine-tune your risk as these signals are often very likely and we can therefore set our stop loss on the high or low of the signal and often we can then backtrack the signal, which I call a trade entry trick that enables enormous potential risk-reward trades:
In order to become a competent trader for price promotions, one has to learn how to interpret the footprint of the money on the chart skillfully and how to use it correctly, This footprint remains as the price movement develops over time.
There are several “tools” in a price dealer toolbox, and the tools that I teach in my professional trading courses are (obviously) the most important, in my opinion. Price action event zones, standard support and resistance levels are just as important as learning individual price action signals and patterns. Event zones as well as support and resistance levels play a crucial role in helping you understand the overall chart context and the market dynamics within which a particular trade has formed. It is THIS interplay between the actual trading signal / entry itself and the general market conditions within which it forms that is a highly likely trading opportunity. Not just "Oh, there is a pin, I'm going to swap it".
It may take years of screen time and experience to refine your ability to understand and properly deal with the different parts of the price action puzzle. However, learning from tutorials like this, as well as more structured training in price action trading, will greatly help shorten the learning curve and shorten the time required to become a master price action dealer.
I really want to hear your feedback in the comments below 🙂