Welcome to the Day Trader's Toolbox, a 3-Part series focused on enhancing your day trading skills.
Day trading is all about seizing quick opportunities without overnight risk. In this first instalment, we'll delve into a fundamental tool every day trader should understand: the Previous Day's High (PDH) and Previous Day's Low (PDL). These levels are essential for making informed, rapid trading decisions, and we'll show you how to use them effectively.
I. Understanding PDH and PDL:
PDH and PDL are straightforward concepts. They signify the highest and lowest prices a market touched during the prior trading session.
However, don't underestimate their significance. These levels are pivotal because they offer undeniable historical context for a market's price movement. As a result, they draw the attention of many market participants, increasing the likelihood of non-random price action at these levels.
Here's why PDH and PDL stand out as the two most vital price lines a day trader can mark on their chart.
Gauging strength or weakness
PDH and PDL offer an objective glimpse into market sentiment, which holds immense value when formulating your daily trade plan.
During the first hours trading, if the market comfortably holding above the PDH it is a clear sign of strength while failure to hold above the PDL is a clear sign of weakness.
Just being aware of this simple concept can help keep day traders on the right side of the market.
Here’s some examples:
Holding above PDH is a clear sign of strength (EUR/USD 5min Candle Chart):
Failure to hold above PDL is a clear sign of weakness (EUR/USD 5min Candle Chart):
Price reversals:
Traders use PDH and PDL to set stop-loss orders, take-profit levels, and as reference points for assessing the risk-reward ratio of a trade.
Given the close attention PDH and PDL receive, they often act as both support and resistance levels, making them prime zones for potential price reversals.
A reversal pattern forming at PDH or PDL typically carries greater significance than one occurring within the prior day's range.
And should a market break and hold above the PDH, it can then provide support when the level is retested. Conversely, a break below PDL may offer resistance when the market trades below it.
Here’s some examples:
PDH and PDL acting as support and resistance (EUR/USD 5min Candle Chart):
Broken PDH becomes support (EUR/USD 5min Candle Chart):
Broken PDL becomes resistance (EUR/USD 5min Candle Chart):
Take note of the compelling examples above. No additional indicators clutter the chart. Armed only with an understanding of how price reacts to PDH and PDL, you can make smart day trading decisions.
For a deeper understanding, add PDH and PDL to your price charts and explore your own instances. You'll be astonished by how the market consistently responds to these levels.
II. How to Use PDH and PDL
Here are some practical tips for using PDH and PDL effectively in day trading:
Identify PDH and PDL: Before you start trading, identify the PDH and PDL levels for the market you are trading. You can draw these levels on yourself or type in ‘Previous Day High and Low’ into the Indicators, Metrics and Strategies bar on Trading View – here you will find a number of scripts that will add PDH and PDL to your charts automatically.
Observe price behaviour: Using the concepts outlined in section one ‘Understanding PDH and PDL’, you can create a game plan for the trading day based upon where price is trading in relation to PDH or PDL. For example, if price has opened within the prior days range the day trader may look to take bearish reversal patterns at the PDH and bullish reversal patterns at the PDL. Alternatively, if price is comfortably holding above PDH, the day trader may look to buy pullbacks.
Combine with other indicators: PDH and PDL are even more powerful when used in conjunction with other technical indicators such as Volume Weighted Average Price (VWAP), moving averages, RSI and many other. This can help validate your trading decisions.
Set stop-loss and take-profit orders: Use PDH and PDL as reference points to set stop-loss and take-profit orders. This helps manage risk and lock in profits.
Stay informed: Keep an eye on news and events that could impact the market. Unexpected news can sometimes cause price gaps that bypass PDH or PDL.
Practice and learn: The best way to become proficient in using PDH and PDL is through practice. Use Replay mode on Trading View to scroll through and replay many different trading days and hone your skills.
In summary, the Previous Day's High (PDH) and Previous Day's Low (PDL) are foundational tools for day traders. They offer valuable insights into market sentiment, help identify potential reversal points, and act as key support and resistance levels. By incorporating these levels into your daily trade plan, you can make more informed and strategic decisions, keeping you on the right side of the market.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.