Price behaviour and price action is something that all traders need to understand and observe in order to be profitable in their trades. Price behaviour around round numbers is something that most forex traders that utilise the scalping method and is looking to take 10 to 20 pips per trade.
Do follow me and look at the chart below as I try to explain how price behaves around round numbers. Do take note however that price tends to react around round numbers but it does not, i reiterate again that round numbers does not guarantee that price will reverse against its preceding momentum. What I mean to say is that if price of a particular pair is falling, round numbers does not necessarily mean that price will then do a reverse turn from there and hence causing a trend change against what the preceding trend was. Trends does not change because of round numbers though occasionally we see instances where round numbers become a level for price to do a reverse turn and leading to a trend change. In this post, I do not recommend that you use round numbers as the main reason to take a longer term or medium term contrarian trades that anticipates a trend reversal.
Follow me as I go along. I have marked on the chart above 5 key levels that I will go about explaining price behaviour. I have marked those levels as A, B, C, D and E. We are going to look at the GBP/USD on 16th December 2010 on the 15 minute chart. The pair have been falling from 14th December 2010 afrom the level 1.5911. The trend is down and it allows us to observe how the price behaves around the round numbers in a down trending market.
At Area A, Price Level 1.59
We start to see that the price facing resistance at these levels. Bearish candlesticks with long shadows start to appear and the candlestick body failed to close above the 1.59 level. Price tested the price level twice before closing with a green candle that has a long shadow above it. Price starts to form a lower high and we can see that there is a double top at that level. Of course we now know that 1.59 is the turning point for the corrective move from 1.5525 and the correction ended there to now resume the down trend in the pair. What we can see from here is that there are other tell tale signs that the round number 1.59 as described above that can be used by forex traders trading the pound dollar to take a short trade. Failure to go close convincingly above 1.59 saw the pair next move downwards towards the 1.58 level.
At Area B, Price Level 1.58
At the 1.58 level, the pair broke through the round figure without any hesitation. There was clearly no support at the 1.58 price level. A full bodied red candle pierced through that level and brought the price down to the 1.574 to 1.575 level. Do take note that after the round number, the next important price level is the middle levels between 2 round numbers.
At Area C, Price Level 1.58
The strong push down below 1.58 then saw a corrective move from the 1.575 level to test the price level 1.58. Traders looking to follow the trend are waiting there to short the pair ad we see that the pair facing difficulties closing above the 1.58 level. It manage however to reach the 1.5814 level, 14 pips above the round number. Failure to move convincingly above the 1.5814 level saw the pair heading lower towards the next round number level at 1.57.
At Area D, Price Level 1.57
Upon reaching the 1.57 level, the price bounced off that level to go 16 pips above 1.57. Take note that the price corrections above the round numbers usually go from 15 to 20 pips above the roundnumbers. If the price goes beyond 35 pips above the round number, you should start to be more careful as there could be a deeper correction. Price corrections above round number levels shouldn’t be above 40 pips. 20 pips is acceptable and I would be looking at price falling from those figures and for the trend to ensue. At 1.57 price level, it seems that most traders have already bought the idea that the trend is down. Price doesn’t stay too long at those levels and it took three 15 minute candlesticks before the price continues on move down again.
At Area E, Price Level 1.56
At price level 1.56, the price shoots up 20 pips in a speedy way upon touchingthat round number. This could be due to traders taking profits off the table once price hits that level. From past experiences, the contrarian move up would not last long and from the chart, you can see that the price did not break past 1.5620. It just managed to hover 20 pips above the round number before price starts to fall again. The extension move down is seen in the long red candlestick that shot down so fast triggering all the stop losses and orders at that level.
We can see that even in a stromg down trend, price do give respect to round numbers. It should be safer to follow the trend when trading then to go against the trend. Nevertheless, do understand that even in a stron trend, price respects the round numbers. What we can conclude from the above analysis is that price can do 2 things with respect to round number levels.
First, it can just bash through the level without giving any consideration to it, hit the mid level or the point 5s and return to test the round numbers again before continuing with the trend.
Second, price bounces off the round number levels for about 15 to 20 pips before breaking through those rounded price levels to continue the preceding trend.
I hope that you have gained some insights on how to use these price levels. They are definitely worth taking a look. Bear in mind that how price behaves around round numbers also indicate how string the trend is and what kind of market environment you are facing. In a ranging market, rounded price levels tend to see bigger jumps off those levels. I hope to share with you such a scenario in future posts.
To your forex trading success!
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