Forex Trading -The Power of Round Numbers

Round numbers are numbers that we often use in our everyday activities such as measuring temperature or buying goods at the market. These numbers provide significant importance in foreign exchange trading.

Why are Round Numbers Important?

In 1999, Dow Jones Industrial Average hit the 10,000 mark for the first time. It took nearly two weeks for the investors to test this level before it finally closed over the 10,000 mark. This was considered a significant milestone and celebrated by many. However, seven years later, Dow was trading at only 11,000, and the investors who celebrated previously had little to show for their excitement.

The reason why humans are drawn to round numbers is that they have ten fingers and toes, which is why they developed a numerical system called “base 10.” Also, humans gravitate to numbers that are factors of 10.

The Effect of Round Numbers

Traders have a strong tendency to enter orders that coincide with round numbers. For instance, a trader may place an order on a specific stock when and if it falls to a $40 level. If multiple traders also place buy orders at $40, the stock will encounter a large pool of buy orders. This often causes a large amount of buying activity that results in the rise of stock value.

The traders generated what is called a “support level” at the $40 mark because multiple buy orders have accumulated at that price. This phenomenon is common to all trading markets, especially in the currency market.

Round Numbers in Forex

The profound influence of round numbers in the Forex market should not be underestimated. A good example of this occurred in early 2005 when the USD/CAD currency pair found support repeatedly at 1.2000. Another example occurred in the early part of 2006 when the EUR/USD found support at about 1.2700. Traders that specialized in round number entry points were able to gain some great rewards.

Moreover, banks enjoy substantial commissions when they implement customer orders around these round numbers. The fact that these orders tend to congregate around numbers creates a major strategy for many traders, and many traders lean on this as a major trading technique.

TheFirst Bounce is the Best

Round number support and resistance is attractive to those utilizing a Day Trading strategy. Day trading is involved in short time frames because the first bounce off of the round number support or resistance is usually the one that is the best and most profitable bounce. Traders are constantly looking for the first bounce off the support or resistance level as longer trading time frames can hide multiple bounces within a single candle spike.

Every time the exchange rate achieves the round number support level, orders are executed, creating a support or resistance level. As this occurs, the pool of orders that created the support or resistance level diminishes, leading to a break in the level once the order is insufficient. It is vital for traders to take advantage of the first bounce off the round number since, at this point, the number of orders is the greatest and produces the biggest value. An active trader can also trade the subsequent bounces, although they tend to yield smaller profits. Trading requires constant vigilance for success unless you use an automated trading system.

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