There are many different ways of looking at support and resistance, with few as compelling as the study of “psychological whole numbers,” says James Stanley of DailyFX.com.
If you’ve been trading on charts for long enough, you’ve surely noticed the odd behavior that prices will have a tendency to exhibit when a “round” number (prices such as .9900 or .9800 on AUD/USD) is seen. Below is a picture of the aussie-dollar’s struggle to get over the ‘parity’ level earlier this year.
As you may know, parity is the price of 1.0000 on AUD/USD; or to put it another way—this is when one Australian dollar is worth one US dollar.
Things get weird at this exchange rate.
As human beings, we have a tendency to value simplicity, and our own internal psychology plays a large role with the odd price behaviors that may be exhibited at these “psychological levels.”
Let’s walk through a simple example:
If someone were to ask you how much you spent on your computer, you’d likely respond with an amount rounded to the nearest hundred (‘ah, about $800,’ or ‘I paid $900.’) Sure, you can give an exact answer like $659.96; but that doesn’t really make any sense. If I had asked the question, I probably don’t care about the $39.96; I just wanted a ballpark idea for how much you paid for the computer.
Out of simplicity, most people (most of the time) will automatically round to the nearest whole number.
This happens in trading too.
What Are the Whole Numbers?
Traders will often call these whole number intervals “double-zeros,” as these prices are at even numbers such as 1.31000 on EUR/USD, 1.57000 on GBP/USD or 132.00 on GBP/JPY. The chart below will identify the ‘double-zero’s’ on the sample EUR/USD chart.
Some traders will even take this a step further by looking at the number directly in the middle of these whole numbers or “the fifties.” These levels, such as 1.31500 on EUR/USD or 131.50 on GBP-JPY can often come into play in the same manner as the “double-zeros.”
One look at any chart, and you will notice that there will often be some element of congestion at these levels as prices move up or down. The chart below illustrates EUR/USD with “double-zeros” and “fifties” denoted:
Notice that many of the price swings on the above chart takes place around one of these levels. This is why we want to incorporate these levels into our support and resistance studies.
NEXT PAGE: Why Do Psychological Levels Work?