How To Use Psychology Level For Entry
Psychological levels are market price levels/levels which are often key levels in forex which are denoted by round numbers. These round numbers often act as support and resistance levels.
Psychological support and resistance work consistently because of fundamental human nature. Humans value simplicity; from a trading perspective, this means valuing integers. Traders often use these numbers as entry, exit or stop levels. These stops and limits can change the order flow and price changes.
Identifying Psychological Levels On Forex Charts
Traders will often call this integer interval 'double zero', as this price is at even numbers like 1.31000 for EUR/USD, 1.57000 for GBP/USD or 132.00 for GBP/JPY.
Some traders will take it a step further by looking at the number directly in the middle of this whole number or the 'fifties'. These levels, such as 1.31500 on EUR/USD or 131.50 on GBP/JPY can often play out in much the same way as a 'double zero.'
Traders will notice that there will often be some element of congestion at these key levels in forex as prices move up or down. The chart below depicts USD/ZAR with the 'fifties' denoted.
How to Use Psychology Level
AUD/JPY Weekly Chart
In the AUD/JPY chart above there are six strong inflections of the 75.00 price level. Every time the price approaches 75.00, the currency pair goes up again. This is because:
- Traders saw the 75.00 price and believed it was cheap which pushed the AUD trade out of this level.
- When traders open short positions, the profit target is set in the range of 75.00. Target profit orders to close these positions create demand in the market (trader orders buy positions to cover, and this buying interest is considered 'demand').
After the first inflection, traders may not be too bullish with the prospect of pushing the price much lower than 75,000 as this price has been shown as support.
In many ways, untested psychological levels can be seen as pivot points. An area where there may be some element of support or resistance.
In general, a round number like 70,000 on AUD/JPY or 1,0000 on AUD/USD will attract more attention than a level slightly above it like 71,000 on AUD/JPY. Most traders will often assign higher power levels to more rounded intervals.
Where traders can really find value with these levels is when the price may have resisted or been supported previously. This tells the trader that others are watching and acting on the price, and the potential 'fulfillment of forecast' from technical analysis may potentially be considered more strongly.
Comments
Post a Comment