Why are Forex round numbers significant?

Anyone who reads the blog will have noticed the focus on Forex round numbers which are sometimes referred to as psychological round numbers or big round numbers .  Humans will often round numbers up and down to a more memorable figure during everyday life.  If someone asks you to buy a loaf of bread from the shops will you think “exactly how much will this cost” and take the correct amount – or will you take something like 5 or 10 dollars?  Most people will do the later option.

Retail traders will often place orders around numbers and large traders will attempt to run stops around the levels as they seek liquidity.  These clusters of orders can cause major volatility.  The round numbers such as the 1.500 level shown below often represent major turning points for the market.  Large institutions and central banks may also be working fx orders around key levels for a multitude of reasons including hedging and currency interventions. Options boundaries and other complex financial transactions could quite conceivably be placed around our levels as the humans working the orders are often attracted to these levels through basic human instinct.  You can read this stop loss hunting post for additional related information.

You don’t have to look very far back to see this round number phenomenon take place

A look at the USDCAD chart below shows how price traded towards parity in August 2011.  The 1.000 level was penetrated by a few pips and price then dropped around 250 pips.  Price then approached the parity area once again and subsequently moved around 10 pips through the level and then dropped around 200 pips.  The second bounce was not as strong and this can often happen as the pool of orders is absorbed on the first hit.

At this stage traders will have certainly been paying attention and when the area was next hit the bulls managed to push the “Loonie” through parity.  Once the level was broken, on a daily closing basis, the USDCAD bulls took price over 650 pips higher and price never once came back to touch the breakout area.

What happened when price did finally retrace the gains and hit our breakout area?  You guessed it – a 200 pip bounce was then seen off parity as a large pool of buy orders was most likely in place and many other traders took profits and liquidated shorts; maybe a large Oil company decided to hedge on their currency exposure as the Canadian dollar  approached this key area, perhaps there was a large “down-and-out” option boundary.  We don’t need to understand exactly why something happens but we can try to benefit from this kind of phenomena as technical analysis traders.

How to trade using Forex round numbers?

Don’t get too excited and trade every hit on a round number this will no doubt lead you to great losses. It may be worth your time investigating how you can incorporate Forex round numbers into a trading strategy though.

Our preferred approach is to look for price action setups around these areas.  The following image shows how trading a bearish engulfing candle at the EURUSD 1.4000 level provided a decent reaction on multiple  occasions.  The level has turned into a price pivot and this often happens.  Conservative traders may prefer to wait for a round number to prove itself as support or resistance before looking for a signal.

Read through the analysis posts on the blog and you will see real time examples of these price action setups at round numbers .  This week alone has seen the Loonie give a pinbar at parity and USDJPY bounce from 80.00.  Price action at whole numbers is something you will see us focus on heavily here.

Whatever you decide to do make sure you test thoroughly without risking your hard earned money.  Take full responsibility and make sure you do not trade live until an edge has been established and the financial and psychological groundwork has been done as every method brings losses.

Related search terms: Round number stock trading, psychological levels forex.