We are continually rounding numbers in our daily activities. It happens when we go to the market, read the temperature, buy a property or go to the gas station. We are immutably attracted to round numbers and those ending in zero. These round numbers play an important role in currency trading.
Why the interest in round numbers?
In 1999, the Dow Jones Industrial Average first hit the 10,000 mark. Investors were testing this level for almost two weeks before it finally closed above 10,000. Even this was a reason for much celebration, as it was considered an important milestone.
About seven years later, the Dow was trading at just 11,000. Investors who looked frantic when it reached 10,000 had little to show for it a few years later.
In 1999 the success of the Dow was one of the most popular events of the year. Financial news channels published four-hour specials praising the event as the second arrival. The whole market was totally absorbed by this figure.
Theories abound that humans have developed a number system called “base 10” because they have 10 fingers and toes. Humans also gravitate to numbers that are factors of 10.
The round number effect
Investors and traders have a very strong tendency to enter orders that match round numbers. For example, a trader can place an order on a specific value when and if it falls to a $ 40 level. If several traders also place buy orders at $ 40 because it looks like the stocks are a good buy at this level, the stocks will come across a lot of buy orders. This often causes a lot of buying activity and as buyers outnumber sellers, the value of the shares will increase rapidly.
In essence, traders have generated what is called the “support level” at the $ 40 mark because several buy orders have been accumulated at that price. This is what psychological support is all about because it is not based on any prior pricing activity.
This phenomenon is common in all trading markets, but is especially common in the foreign exchange market. The reasoning behind this round number phenomenon in the trading of goods, stocks and currencies is that part of humans that is attracted to round numbers. As long as people are involved in trade, this phenomenon will be present.
Round numbers in Forex
The profound influence of round numbers on the foreign exchange market should not be underestimated. A good example of this occurred in early 2005, when the USD / CAD currency pair repeatedly found support at 1.2000. Another example occurred in early 2006 when the EUR / USD found support at around 1.2700. Traders specializing in round number entry points were able to get great rewards.
Banks enjoy substantial commissions when they implement customer orders around these round numbers, as they tend to accumulate large groups of orders. The fact that these orders tend to congregate around numbers creates an important strategy for many traders and many traders rely on this as an important trading technique.
The first bounce is the best
The support and resistance of round numbers are extremely attractive to those who use a Day Trading strategy. The time periods involved in daily trading are usually very short. This is due to the fact that the first bounce of the support or resistance of the round number is usually the one that is the best and most profitable. Traders are constantly looking to make sure they are seeing this first bounce. Longer trading periods are ineffective because they can often hide multiple rebounds within a single candlestick.
Each time the exchange rate reaches the round number support level commands are executed. When this happens, the set of commands that created the support or resistance level decreases. Once the order level is insufficient to affect the support or resistance level, that level will eventually break.
It is for this reason that it is vital that traders take advantage of the first bounce of the round number, as it is at this point where the number of orders is greatest and produces the most value. An active trader can also trade subsequent rebounds, although they tend to make smaller profits. Trading requires constant monitoring to succeed unless you use an automated trading system.
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