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Elementary Support and Resistance …

Psychological Levels

In technical analysis, Partner Center

a psychological Find a Broker
level is a price level
that is perceived as
significant by
traders, often due to
its round number or because it has
previously acted as a support or
resistance level.

These levels are not based on any

inherent fundamental value, but rather
on the collective perception and
behavior of market participants.

These levels, often referred to as

“invisible lines” often influence both
individual and institutional traders’
actions, leading to predictable
patterns in price movements.

What are
psychological levels?

Psychological levels are price points

in financial markets that hold
significant meaning for traders and
investors, mainly due to their
simplicity and ease of remembrance.

Typically, these levels are round

numbers, ending in “00” or halfway
points like “50“.

With currency pairs, the exchange

rate of “1.00” or “parity” is also a big
deal.

Traders tend to anchor their decisions

around these levels, leading to
increased buying and selling pressure
when prices approach or surpass
them.

A nice way to think about

psychological levels is that traders
become psychos when prices near
them.

For example, if USDJPY is

approaching a round number like 100,
traders may be more likely to buy or
sell at that level, as they may feel that
it represents an important milestone.

Similarly, if USD/JPY has previously

bounced off a certain price level,
traders may see that level as a key
support or resistance level, and may
adjust their trading accordingly.

Why do psychological
levels matter?

Psychological levels are important in

technical analysis because they can
influence the behavior of traders.

The human brain is naturally inclined

to seek simplicity and order. In
trading, this tendency results in a
preference for round numbers and
other easily recognizable patterns.

As more market participants focus on

these levels, they can become self-
fulfilling prophecies, with prices
reacting predictably as they approach,
hit, or break through psychological
barriers.

For example, a significant

psychological level like 1.0000 in the
EUR/USD currency pair may attract a
substantial amount of attention from
traders.

As the price nears this level, some

traders may place buy orders in
anticipation of a bounce, while others
may place sell orders, expecting a
reversal.

This increased activity can result in

price fluctuations around the
psychological level, leading to trading
opportunities for yourself.

What are examples

of psychological
levels?

Here are some examples of

psychological levels:

Round numbers: These are

price levels that end in zero or

five, such as 100 or 1.50. These

levels are often seen as

psychologically significant, as

they represent round numbers

and are easy to remember.

Previous highs or lows: If an

asset has previously reached a

certain high or low price, traders

may see that level as a key

support or resistance level, and

may expect the price to bounce

off that level again in the future.

These could be daily, weekly,

yearly, or all-time highs (or lows).

Moving averages: Moving

averages, which will be discussed

later in the School of Pipsology,

are commonly used in technical

analysis to identify trends and

potential support or resistance

levels. Traders may see a moving

average as a psychological level

if it has previously acted as a

support or resistance level.

How to Trade
Psychological Levels

1. Identify Key Levels: The first

step in incorporating

psychological levels into your

trading is to identify the key

levels relevant to the financial

instrument (e.g. currency pair)

you are trading. This can be

done by observing historical

price action and noting round

numbers where the price has

previously shown significant

reactions.

2. Monitor Price Action: Keep a

close eye on how the price

behaves as it approaches a

psychological level. Look for

signs of increased price

volatility, as this can indicate

heightened interest from

market participants.

3. Set Entry and Exit Points:

Once you have identified a

psychological level and

observed price action around

it, use this information to set

entry and exit points for your

trades. For example, if the

price has bounced off a

psychological support level,

you might enter a long position

just above the level and set a

stop loss slightly below it.

Summary

In summary, a psychological level in

technical analysis is a price level that
is perceived as significant by traders
and investors, often due to its round
number or because it has previously
acted as a support or resistance level.

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These levels gain significance simply

due to the attention traders pay to
them.

Traders will often react and make

trading decisions around these levels
even though there may not be any
logical importance of that specific
number.

Traders often set their orders around

these levels. So when a price
approaches these levels, it can
trigger a cluster of buy or sell
orders that causes the price to stall
or reverse.

Breaking through a psychological

level can signal a further move in that
direction as it suggests traders’
attitudes or psychology around that
stock or market are changing.

For example, EUR/USD breaking

through 1.00 to the upside could
signal bullish momentum.

Markets will often test these levels to

see if they still hold before continuing
a trend. For example, a market may
rally up to but not quite reach a round
number before pulling back again.
Then make another run at that level.

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