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.
- 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.
- 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.
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.