Supply and Demand Level Test

Level Test

The level test or LT is a type of PA where price leaves a level, and then comes back to test it before continuing in the original direction. They help to show the origin of the imbalance that caused a big movement in price. As a supply and demand trader I look for level tests at supply and demand levels.

Short LT

  • Price drops down
  • Price comes back up to supply before dropping in a large fashion breaking demand, SR and creating a LL

If price breaks demand or SR on the initial move down, there is more confluence for the setup.

LT from supply image 1

 

Long LT

  • Price rallies
  • Price comes back to demand before rallying in a large fashion breaking supply and SR and creating a HH

If price breaks supply or SR on the initial rally, there is more confluence for the setup.

LT from demand image 2

A common way of identifying supply and demand levels as taught by many is to look for “fresh” levels which have not yet been tested. Many traders new to the supply and demand concept sometimes have trouble when entering with limit orders from “fresh” levels.

The LT into a supply or demand level shows just how great the imbalance is at the level and acts as further confirmation that there is indeed a big imbalance there for those who need it. This type of PA is also known as a Hook.

Happy Trading

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2 Comments

  1. gg on January 12, 2016 at 16:25

    Hi Joe,

    Nice article. What’s ur opinion on 3rd or 4th time price come back to LT level? Is’t safe to entry?

    tq.

    • Joe Wright on January 12, 2016 at 17:44

      Hey GG

      Generally the more times price hits a level the less you want to trade from it. This is causes the buy orders (at demand), or the sell orders (at supply) are being filled each time prices hits the level. Once they’re all filled price will trade through the level. It’s safer to avoid it but if you do decide to trade it then I would use confirmation as I do for all my trades..

      Joe

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