Forex traders often pay attention to key levels in the market. These are psychological costs that relate to the mind and way of thinking of people. The following major topics about psychological thresholds and round numbers in forex trading will be covered in this article:
- Definition of Psychological level
- Identifying mental states
- Forex trading with psychological levels
- Advantages of psychic levels and their limits
What are psychological levels, and how do they function?
Market price levels, or psychological levels, are often important levels in the forex market and are signified by round numbers. The levels of support and/or resistance are frequently represented by these round numbers.
Because of innate human nature, psychological support and resistance continually function. People desire simplicity, which in the context of trading implies they favor entire numbers. These figures are often used by traders as entry, exit, or stop levels. The order flow and price variations may be affected by these stops and restrictions.
ANALYSIS OF PSYCHOLOGICAL LEVELS ON FOREX CHARTS
The fact that these prices are at even values, such as 1.31000 on the EUR/USD, 1.57000 on the GBP/USD, or 132.00 on the GBP/JPY, leads traders to refer to these whole number intervals as “double-zeros.” The current USD/JPY chart’s “double-zeros” are shown in the chart below.
Some traders may go one step further by examining “the fifties,” or the number that is exactly in the Centre of these full numbers. These levels, like 1.31500 on the EUR/USD or 131.50 on the GBP/JPY, often enter play in a similar way to the “double-zeroes.”
As forex prices go up or down, traders will typically notice some degree of congestion at these crucial levels. The USD/ZAR chart below shows the exchange rate with “fifties” indicated.
On the chart above, you’ll see that one of these levels is the location of several price swings. Therefore, traders seek to adjust the support and resistance levels to include these levels. The first USD/JPY chart with determined swing levels is shown in the graph below.
As a result, these prices function as a psychological line that serves as both support and barrier. These prices don’t all operate as supports or resistance, but enough do that the trader should pay attention to these levels.
APPLYING PSYCHOLOGICAL LEVELS IN FOREX TRADING
Weekly AUD/JPY chart
There are six significant inflections away from the 75.00 price level on the AUD/JPY chart shown above. The currency pair rose once the price got close to 75.00. This is due to:
- Trades for long AUD were made off this level as a result of traders believing the price of 75.00 to be low.
- Profit goals were positioned at an even 75.00 as traders started to build short bets. Demand was produced in the market as a result of this profit target order to close positions (buying activity from traders who were covering positions is referred to as “demand”).
As this price has previously been shown as support, traders may not have been very enthusiastic after the initial inflection about the likelihood of pushing price much lower than 75.000.
Untested “psychological” levels resemble pivot points in many respects. a location where there could be some support or opposition.
Round values, like 70.000 on the AUD/JPY or 1.0000 on the AUD/USD, often attract more attention than lower levels, as 71.000 on the AUD/JPY. The more rounded-intervals are often given a greater level of strength by most traders.
When prices may have previously resisted or been supported there, that’s when traders may truly locate value with these levels. This informs the trader that other people are seeing and responding to those prices, and the possibility of technical analysis’s “self-fulfilling prophesy” may possibly be given greater weight.