Forex Round Numbers And Why They Matter
The forex market has a tendency to bounce off major round numbers. Traders looking to benefit from the phenomenon need to build a strategy based around the order flow associated with these levels. First of all it should be noted that he market will not reverse every time it hits a round number. Traders work with probabilities and anything which can be used to build on an edge is worthy of note.
The USDCAD currency pair recently traded towards the parity level at 1.000. One first reaching the level price then pierced by a few pips and subsequently retraced hundreds of pips. Soon after the same thing happened again. Why does this happen you may ask? Well it comes down to order flow. The cluster of orders based around key levels like parity on the USDCAD currency pair means that volatility can often follow a move into the figure.
We will now look at the order types that are clustered around these levels. First of all the retail traders will place trade entries above and below the round numbers. An order above through the level will trigger and the trader aims to benefit from the following momentum. If the trade does not move in the desired direction the stop loss order is often placed on the other side of the figure. The liquidation of a trade is a reverse order so the stop loss on a buy trade is a sell stop. What happens when this triggers? The sell order pushes price lower as demand for the asset diminishes. No one trader moves the forex in isolation but the aggregate effect of many orders causes the movements we see on the charts.
Large institutions may also place orders around key forex round number levels. If a Japanese auto company needs to convert Yen into Dollars it makes sense that the human inputting the order will most likely choose to place it near some kind of round number. Not always but once again we are working in probabilities. Large speculators also trade in options and the boundary levels for these options are quite often round numbers. There is therefore a financial incentive for speculators to protect these option barriers and often the level will be untouched even as price move within a few pips. A penetration of the level will sometimes see a subsequent loss of interest in protecting the area and this causes the price to move through with additional volatility.
The EURUSD and related currency majors are some of the best areas to begin looking for this phenomenon. All of the above should not be taken as a reason to blindly trade around these areas as the forex market is extremely risky. If trading the euro you should do your analysis and your own EURUSD forecast before looking at the specific round numbers. The euro can be a good starting point when trying to build a trading strategy though and demo trading allows this to be done with no risk involved.