Using Psychological Price Levels for Your Trading

This is a
very simple concept. Psychological price levels are those prices with round
numbers. For example, 1.2500 or 1.2000, are round price levels and they can act
as support and resistance like other technical tools.

They are called
“psychological” because they are easy to recognize and remember. They are
usually called in the news feeds "handles" like "GBPUSD broke
the 1.20 handle". You can see in the AUD/USD chart below how price reacts
to those levels, sometimes even perfectly.

AUDUSD Daily Chart

Although
they look good, you shouldn’t use them as your sole reason to take a trade of
course but have a fundamental direction first and then you can maybe structure
the trade technically including such round levels as an extra layer of
confluence to other technical levels or indicators. You can even use round
numbers every 100 pips like in the AUD/USD chart below.

AUDUSD 4 hour chart

As you can see,
they work but they are not perfect and that’s why you should not rely solely on
them for your trading decisions. Moreover, in the chart you can also see why
using a tight stop loss is a really bad idea because it doesn’t increase your
risk to reward but simply increases your risk of being stopped out prematurely.
You should get good prices to buy or sell at, but don’t waste your time and
money on picking the very perfect price.

This article
was written by Giuseppe Dellamotta.