Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
We have looked at many different ways of assessing support and resistance on ditto trade, but today, we will look at the compelling study of psychological whole numbers and their practical application in technical analysis.
If you look over previous data or have been trading the charts for long enough, you may have noticed that prices will have a tendency to react surrounding a rounded number. As we see here, we have a well-respected resistance level that has been tested multiple times, and generally, price reacts and rejects at this whole number.
The term parity can be used in a few ways when trading, but always as an expression of equality. The most common use of parity is in the forex market is where it signifies the point where two currencies have equal value. That would mean that the exchange rate between the two currencies is exactly 1/1, or to put it another way, for example, this is when One Australian Dollar is worth One US Dollar.
This is where psychological whole numbers can be observed as people generally have a tendency to value simplicity as comfortable; our internal psychology plays a large role in the market behaviour surrounding these psychological levels.
If someone were to ask you how much you had paid for your car, you would most likely respond with an amount rounded to the nearest thousand or hundred. People generally will say I paid six thousand and 5890.99 If I had asked the question, I would just want the rough figure, and it’s pretty unusual to get that response.
So what are the whole numbers? Traders will often refer to these whole numbers as double-zeros as these prices are at even numbers such as 1.31000 on EURUSD, 1.57000 on GBPUSD or 132.00 on GBPJPY. Here we have the EURUSD chart with the double zero figures highlighted. There is a definite level of respect in terms of support and residence surrounding these whole numbers as you can see here.
It’s not uncommon for traders to include the midpoint between the whole numbers and highlight the middle of these whole numbers or the fifties. These levels can also hold some value as the double zeros do playing into the psychology of market participants.
After adding the midpoints into the previous example, we can now see those looser areas where price didn’t look quite right tidied up and is now congesting appropriately along those lines. Note that many of the price swings on the chart take place around one of these levels. This is why we want to incorporate these levels into our support and resistance mindset. Whole numbers can be used as an almost confirmation when considering trade setups.
As always in forex this never a sure thing! Not every one of these prices are going to respond as support or resistance level, but enough do that these levels warrant your interest.
Why do psychological levels work?
Let’s look at a working example. The EURUSD shown here reflects price strongly respecting 1.3000. Each time this price was approached, the currency pair rebounded back up. This can be explained for a few reasons.
It’s possible that traders simply saw this as a decent price level to buy in at as it was good value. But more than likely, as traders were opening short positions during the falling market price, they set profit targets at an even number.
As we know, when a large number of market participants close their sell positions, The profit target order to close creates a demand in the market, which in turn forced the price back up.
After the first test, traders may not have been especially bullish on the prospect of pushing the price much lower than 1.3000. This price has already been exhibited as support.
Untested psychological levels can be viewed a lot like pivot points are. It’s an area where there may be some element of support or resistance, but we won’t be able to know for sure until after this occurs.
In general, round numbers such as 1.30000 on EURUSD or 1.0000 on AUDUSD or USDCAD will draw more attention than a more normal level like 1.31000 on EURUSD. Traders will usually assign a higher degree of strength to the more rounded market levels, and you should keep that in mind. Just as we discussed that certain candlesticks show higher probability, we can view whole numbers the same way, mentally assigning them a degree of strength and likelihood to affect our trades.
Whenever we see multiple tests historically where these levels have been supported or resisted, it shows us that others are noticing and acting on these price levels. This increases the likelihood of reversals or rejections, and in our minds, we can view them with a higher degree of strength.
Please take what you have learnt your today and apply it to historical data initially and then to your future decision making. Contemplate the power of psychological whole numbers and their application within your technical analysis and remember contemplation is the key to learning.