Forex - About Rounding Off

We perform rounding off numbers in our daily activities, be it going to the market, considering the temperature, or buying a piece of property. All of us are drawn to round numbers or those that end in zero. In trading, round numbers have a major role to play.

The Reason Behind the Interest in Round Numbers

The Dow Jones Industrial Average approached the 10,000 mark for the first time in March of the year 1999. The event included index testing investors for approximately two weeks before finally closing above 10,000. This event was greeted with elaboration because it was a significant milestone.

Seven years later, the extensively tracked index was trading at an estimated 11,000. The investors who frenzied during the peak of the Dow 10,000, however, had little to show for it.

Back then, the success of Dow was highly publicized and filled the front pages of newspapers and magazines. Channels for financial news ran four-hour television specials advertising the event. At the time, the whole market was absorbed on the figure.

There are some scientists who believe that human beings generated a numeric system called "base-10" because we are born with 10 toes and 10 fingers. More so, we began to believe in terms of factors of 10.

The Effectiveness of Round Numbers

Traders and investors have a strong tendency to put orders that coincide with round numbers. For example, an analyst may have said that he would buy a specific stock if it falls to a specific amount, for instance $40. If several traders placed buy orders for that stock at $40 per share, since they believe that the stock is a bargain at that price, the stock will encounter a large pool of buy orders. When these orders are activated, they can unleash an incredible amount of buying power. When buyers are more aggressive or outnumber sellers, the price will surely rise.

Basically, the buyers have generated a support level at $40, since several orders have accumulated at that level. Traders call this as the psychological support, since it is not entirely based on any prior price action.

This phenomenon is real and normally happens in all forms of trading, especially in the forex market. The reason why commodities, currencies and stocks all subject to round number phenomenon is because it is a part of the human nature to be attracted to round numbers. Therefore, the event can occur in any market traded by humans.

Round Numbers in Forex

There is a profound influence of round numbers in the forex market. For instance, back in the early part of 2005, the USD/CAD currency pair found support repeatedly at 1.2000. Another is in early 2006, when the EUR/USD buyers stepped in repeatedly within the vicinity of 1.2700. Traders who use such round numbers as entry points were rewarded handsomely.

A pool of large orders can generate an attractive target since banks can earn commissions when their customers orders are implemented. More so, since the orders tend to congregate at round numbers, the trader can take this tendency into consideration when creating his or her strategy.

The First Bounce is The Best

For a day trading strategy, time frames will be strangely short. This is because the first bounce off of round number support or resistance is normally the best bounce, and so traders desire to be certain that they are seeing the first bounce. On the other hand, longer time frames cannot also be used for this kind of strategy since they can hide multiple bounces within a single candle.

Every moment the exchange rate achieves the round number, orders are normally executed, and the pool of orders that produces the level of support and resistance is diminished. Once the total of orders remaining is no longer enough to repel the exchange rate, it is not odd for the level of support and resistance to break, sooner or later.

This is why it is very essential for the traders to trade the first bounce off of the round number, since it is at this point that the pool of orders is most valuable. The traders can also trade subsequent bounces as well, though the first bounce always has the greatest potential.