GBPUSD by Capitalcom – TradingView

Welcome to the Day Trader’s Toolbox, a 3-part series focused on improving your day trading skills.

Day trading is all about seizing quick opportunities without overnight risk. In this first installment, we’ll delve into a fundamental tool every day trader needs to understand: the Previous Day’s High (PDH) and Previous Day’s Low (PDL). These levels are essential for making informed, quick trading decisions, and we’ll show you how to use them effectively.

I. Understanding PDH and PDL:

PDH and PDL are simple concepts. It indicates the highest and lowest prices that a market touched during the previous trading session.

However, do not underestimate their significance. These levels are crucial because they provide undeniable historical context for a market’s price movement. As a result, they attract 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 important price lines a day trader can mark on their chart.

Measure strength or weakness

PDH and PDL provide an objective look at market sentiment, which is of great value when formulating your daily trading plan.

During the first hours of trading, if the market holds comfortably 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 are some examples:

Holding above PDH is a clear sign of strength (EUR/USD 5min Christmas Chart):

Failure to hold above PDL is a clear sign of weakness (EUR/USD 5min Christmas 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 that forms at PDH or PDL typically has greater significance than one that occurs within the previous 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 can provide resistance when the market trades below it.

Here are some examples:

PDH and PDL act as support and resistance (EUR/USD 5min Christmas chart):

Broken PDH becomes support (EUR/USD 5min Christmas Chart):

Broken PDL becomes resistance (EUR/USD 5min Christmas chart):

Take note of the compelling examples above. No additional indicators clutter the chart. Only armed with an understanding of how price reacts to PDH and PDL can you make smart day trading decisions.

For a deeper understanding, add PDH and PDL to your price charts and explore your own cases. You will be surprised how consistently the market reacts to these levels.

II. How to use PDH and PDL

Here are some practical tips to use 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 yourself or type ‘Previous day high and low’ in the Indicators, Metrics and Strategies bar on Trading View – here you will find a number of scripts that will automatically add PDH and PDL to your charts.

Observe Price Behavior: Using the concepts outlined in section one ‘Understanding PDH and PDL’, you can create a game plan for the trading day based on where price is trading in relation to PDH or PDL. For example, if the price opened within the previous days range, the day trader might take bearish reversal patterns at the PDH and bullish reversal patterns at the PDL. Alternatively, if the price holds comfortably above PDH, the day trader can 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 others. 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. It helps manage risk and lock in profits.

Stay informed: Keep track of news and events that may affect 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 browse 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 ground instruments for day traders. They provide valuable insights into market sentiment, help identify potential reversal points, and serve as key support and resistance levels. By incorporating these levels into your daily trading 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 is not investment advice and does not take into account the individual financial circumstances or objectives of any investor. Any information that may be provided regarding past performance is not a reliable indicator of future results or performance.