Round Numbers in Forex
admin on March 3rd, 2012
This is a guest blog post provided by http://www.
The foreign exchange market currency pairs often have a tendency to rebound off significant round numbers. Forex traders aiming to take advantage of the phenomenon have to construct a system based on the order flow connected with these levels. To begin with it ought to be mentioned that the target market won’t change direction whenever it visits a round number, if only life was this simple… Professionals deal with probabilities and whatever that can easily be utilized to develop an edge is deserving of notice.
The Dollar/CAD currency pair, not too long ago, traded into the parity level at 1.000. This is a historical level that has proved to be excellent support and resistance on many occasions. On first hitting the parity level the price subsequently pierced it by a number of pips and then retraced hundreds of pips lower. Shortly after, a similar thing occurred again. How come this happens you might inquire? Well it boils down to the order flow that builds at these key areas. A cluster of orders based upon key levels like the 1.000 parity one we mentioned signifies that volatility can frequently follow a shift into the level.
Retail traders often position trade entries over and underneath the Forex round numbers. An order above the level may trigger and the trader seeks to profit from the subsequent momentum. If the position doesn’t move in the preferred path the stop loss is frequently put on the other side of the number in question. The liquidation of the order is a reverse one so the stop on a buy position is actually a sell stop. What often takes place once this triggers? The sell order forces price lower when interest in the asset decreases. No retail trader moves the Forex in isolation however the combination and aggregate influence of numerous orders leads to the price action activities we often see on the charts. Banks and hedge funds may also be placing orders around these key areas. Perhaps even large companies who need to deal in the FX market in order to pay wages. There are many variables and we will never know half of them but this does not change the fact that these numbers often provide major turning points.
The above should not be taken as a reason to blindly trade around these areas as the Forex market is extremely risky. It is much better to trade with other confluent factors. The following can all be used in conjunction with round numbers:
- Candlestick analysis
- Momentum breakouts
- Reversal patterns including double tops and ABC corrections.
- Moving average reversals.
- Horizontal support and resistance breakouts and reversals.
These are of course just examples and there are many other technical analysis techniques that can be used. Some traders will even try to use Forex trading robots known as expert advisors to trade these round number areas via different strategies.
The above all go to show that the round numbers are just another part of the puzzle and should be used with discretion. Half of the battle when trading is having the patience to wait for all of the confluence elements to line up and be fully aligned before pulling the trigger and placing a trade on your platform. The temptation is to enter when any signal comes as the fear and greed element is always there. Greed, as you think a good opportunity to make money, is there and so is fear that you may miss it. It generally pays to be patient though and pick the best signals. Even these can lose so good money management is essential. Demo trading to prove yourself as a profitable trader is always a god idea as this gives an opportunity to see if you can trade without losing money. Maybe you can try incorporating round numbers into your strategy.