There are interesting articles at dailyfx about whole numbers in forex trading and I will try to retell interesting oppinion.
There are many ways of looking for support and resistance, but psychological whole numbers are compelling. If you have ever traded on charts, then you must have noticed the unusual behavior, that prices would have an inclination to show when the ’round’ number (9900 or 9800 in case of AUDUSD) is seen. Here I explain ‘parity level’ for currency pair AUDUSD.
What is Parity?
Parity is a price equal 1.0000, in case of currency pair AUDUSD, or in other words when Australian dollar worth is equal one US dollar.
At These Exchange Rate Thing Get Weird:
It is our nature that we want value simplicity; our internal psychologies play a big role with the strange price behavior that may be shown at this ‘psychological level’. Let me explain with a simple example.
Suppose you have bought a computer at $790, and someone asks you the price, you would tell the amount in round figure like, $800. Sure, you could tell exact price Seven-hundred-and ninety dollars, but it does not make any sense. He doesn’t care about the $790; he only wants a rough idea of the computer price.
Most people automatically round the press to the closest whole number; exactly happens in trading as well. Traders who want to sell the currency pair AUDUSD put a stop at 1.0000 levels; don’t imagine that the price may come into play soon thereafter.
What is Whole Number?
The trader often calls this whole number interval ‘double-zero’, because the price is at even number like, 1.31000 in currency pair EURUSD. The chart identifies the ”double-zero’, onto the present EURUSD chart, some traders take a step forward and look at the numbers directly in the mid of the whole number or ‘the fifties’. This level like in case of currency pair EURUSD at 1.31500 come into play like ‘double-zero’, manner.
If you look at any currency chart, you will always notice some congestion element at this level, because price moves up or down.
Why Psychological Level Works?
Psychological Support & Resistance usually works, as I mentioned above human beings, always want value simplicity. They think in whole number and place stops or limits, in whole numbers.
These limits and stops cause price changes and flow order.
I explain you with an example of currency pair EURSUD. The price has made a large movement down side around the events and news about the Europeans Debt Crisis. I have marked three strong changes of the value 1.3000 neighborhoods.
Every time price reached 1.3000, the EURSUD bounced back up. It could be explained by few reasons. May be traders saw 1.3000 price and thought buy some Euros or perhaps traders were going to short positions, so they set their profit targets at 1.3000 an even level, so, when the price hit they had had a outstanding order for ‘buying to cover’. This order for closing position on profit generated demand in the currency market. Though they purchase to cover the position, but this purchasing is considered ‘demand’.
Generally, round numbers attract more attention than pedestrian levels like , 1.31000 in case of currency pair EURUSD.