This time we will discuss the price levels that are formed in the market just because of the traders’ behavior. I will tell you how to trade in the area of psychological levels as well as about the indicator that helps you determine them.
Forming Of Psychological Levels
We all dream of a simple and comfortable life. Out of this desire, we all have a habit of rounding everything out so it is easier to imagine and count in the mind. Let's say you want to buy a book for $19. When you think whether it is expensive or cheap you consider $20 in your mind. You will call the same round number to someone else if you talk about the cost of this book.
Forex traders have the same habit. The most attractive numbers for them are the multiples of one hundred - 1.0500, 0.1000, 0.0900, etc. Around these levels, bulls and bears collide most frequently. It happens as, for convenience, traders set Stop Loss, Take Profit, and pending orders around there. Large volumes of such orders greatly affect the price movement. Eventually, support and resistance levels are often formed around the levels that are multiples of one hundred and they are called psychological.
Additional Psychological Levels
Multiples of one hundred are most popular among traders. However, they are not the only ones that attract intraday traders. This also includes quotes that end with 20, 50, and 80 - 1.0520, 0.1050, 0.0980. Here again, everything is explained by human psychology:
- 50 is half the distance traveled from one psychological level, a multiple of one hundred, to another. Not everyone dares to play big, hoping for 100 points at a time. Half is much easier to cope with and that encourages traders to concentrate on quotes ending with 50.
- 20. Imagine that the price has just begun to move from the level of 1.0500 and is now located somewhere in the region of 1.0512. It is difficult to be sure at this stage that the chart will continue to grow. But when the price reaches at least 1.0520 the trader’s confidence in further growth will increase and he will most likely begin to act. However, remember that this is not a real market analysis but only human psychology.
- 80. It’s similar to level 20. When the price fluctuates somewhere around 1.0573 it is difficult to say whether it will continue to grow. When the chart reaches 1.0580 it seems to the trader that the next round number is closed enough to act.
How To Quickly Draw The Levels
If you focus on psychological levels in trading, the “Key Levels” indicator can help you. It automatically draws multi-colored lines in the region of mentioned numbers:
In the program settings, you can choose whether to separately indicate the levels 00/50 and 20/80. You can also choose colors for each line yourself.
How To Trade Around Psychological Levels
Experienced market makers use traders’ attachment to round numbers. They have a huge impact on quotes and can reverse the market just a couple of points before reaching one of the psychological levels. In addition, the high activity of traders in those areas can lead to frequent requotes and slippages.
Make sure to keep this in mind when trading. Focus on prices 5 points above or below psychological levels:
- Place pending orders at 1.0575, not 1.0580
- Take Profit set at 0.0895, not 0.0900
- Set Stop Loss at 0.1015 instead of 0.1020, etc.
Psychology will provoke you to focus on the psychological levels and use them in trading. Fight the urge. This will save you a lot of money.