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Education post 15/100 – How to trade Psychological Price Levels?

FX:USDCHF   U.S. Dollar / Swiss Franc
What are Psychological levels?

Psychological levels are price levels which tend to draw big market attention and typically witness a reaction by price when tested. These levels are the main round numbers (whole numbers), referred to as “Double Zeros such as .9800, .990.

Plotting support and resistance levels is often a challenging and subjective task. It is also commonly one of the first areas of price action new traders attempt to tackle.

Support and resistance can be established in numerous ways, such as: trendlines , moving averages, pivot point levels, Fibonacci levels, key high/low points etc. A common complaint with a lot of these methods though is subjectivity.

This is why we believe psychological levels are appealing, as the numbers are effectively embedded within market structure and are entirely objective, as you’ll see going forward. 

So...What are Psychological levels?

Say that you’re the proud owner of new car, and a buddy down the pub asks how much it cost. Assuming it set you back $10,999, it’s unlikely that you would tell him that exact figure. Instead, to keep things simple, you’d probably round the number to the nearest thousand i.e. $11,000. And this is exactly what happens in the financial markets! It is far more likely that a trader will select 1.2500 over 1.2493, for example.

Why do they work and how to trade them?

Trading  support and resistance  can be a fantastic way to approach the market and for many new traders this is one of the first areas of technical analysis that they come to properly understand. There are a great many varieties of support and resistance in the market that traders can look to build strategies around such as: key highs/lows,  trend lines , Fibonacci levels, moving averages, pivots , Bollinger bands and more. However, there are also levels that are already embedded within the market that can act as powerful support and resistance and traders don’t need any tools or to perform any complicated analysis to find them. These levels are called “Psychological levels”

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