Trading Psychological Whole Numbers

Focus: FOREX

James Stanley Image James Stanley Trading Instructor, DailyFX Education

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:

chart
Created with Marketscope/Trading Station
Click to Enlarge

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.