Using Round Numbers for a Forex Swing Trading Strategy

Institutional traders and forex market makers collectively known as the ‘whales’ usually place their orders at or near round numbers. Learn how to take advantage in your trading.

What are round numbers?

The roundest number of all (literally) is zero! Round numbers end in a zero. These levels are of particular interest because traders, especially the biggest traders (whales) tend to place their orders near them.

 

In forex markets, traders will refer to round numbers as ‘double zeroes’

EUR/USD = 1.2100

USD/JPY = 105.00

 

The most significant round numbers are the triple zeroes

EUR/USD = 1.2000

 

Some traders will also look at the mid-points between round numbers, known as the ‘fifties’

EUR/USD = 1.2150

 

If you are investing in a stock priced at $21.33, the nearest round number might be $20. If day trading, the nearest round numbers for the stock might be $21 and $22.

Why do round numbers work?

Round numbers are also known as psychological levels because of something psychologists call the ‘round number bias’. People are biased toward focusing on round numbers as part of their natural information filtering processes used to get by in day-to-day life.

When looking at the price of anything from used cars to currencies, people tend to ‘round up’ or ‘round down’ the price they are dealing with. This makes sense for ‘getting the feel’ for the value of something without communicating unnecessary detail.

An extension of this use of round numbers is through options markets. FX Options barriers tend to happen at round numbers, meaning a flood of trading happens when call options and put options are exercised when these barriers are crossed.

Round numbers on forex charts

The round numbers are referred to as The Double Zero’s in this thread on Forex Factory.

 

Psychological_Whole_Numbers

Source: Forex Factory

The chart above nicely depicts the general idea when trading with round numbers as part of a forex trading strategy. Here are some concepts:

  1. Price will tend to reverse near round numbers
  2. Not every round number causes a reversal
  3. Price swings will generally run 3 to 4 round numbers (300-400 pips) pips in a trend
  4. Price swings will generally go 1 or 2 round numbers 100-200 pips in a correction
  5. It’s not necessary to pick the absolute top or bottom of a swing to profit

Round numbers as support and resistance

Bringing round numbers back to familiar technical analysis territory, they can really be thought of and used as another form of support and Resistance.

  • When price falls to a round number, it can act as support.
  • When price rallies up to a round number, it can act as resistance.

Traders can use round numbers alongside other types of support and resistance formed by previous price highs and lows, Fibonacci retracements or trendlines to find a confluence of support or resistance at a price level.

How to use round numbers

Understanding the power of round numbers in how traders think and how markets operate is the first step. The second step is putting this understanding to use.

Round numbers can be a cornerstone of a price action trading strategy, and we outline a simple trading strategy that any beginner trader or expert trader can use below.

Round numbers can also just be an extra consideration for entry and exit prices as well as for stop loss placement. The simple logic for stop losses and take profit orders is that price tends to gravitate towards round numbers so you can benefit form keeping your take profit levels near them and stop losses away from them.

Round number trading strategy: Swing trading

Swing trading aims to hold a forex trade for a few days but sometimes for weeks to capture a ‘swing’ within the primary trend. These Swings will often incorporate the price moving through 3 or 4 round levels.

A look at the following downtrend in the AUD/USD currency pair shows three 300-pip swings that start and end close to round numbers.

 

AUDUSD_2021-08-26_15-32-00

The swings in the price sometimes stop almost perfectly at the round numbers, but sometimes they fall just short or runover them before reversing. Which one happens doesn’t matter for the purposes of a swing trader. If you are targeting a 300-pip profit on a forex trade, you don’t care about missing 20-pips or even 50 pips at the start or end of the move. Your sole objective is capturing those core 300 pips. The scalpers and day traders can fight over the rest.

Round number Swing Trading System

Setup part 1: What is the direction of the trend? Use Dow Theory, moving averages or your preferred technical analysis to determine the trend. Only trade with the trend.

Setup part 2: Wait for the price to swing in the direction of the trend

Setup part 3: Wait for a correction to begin after a high in an uptrend or low in a downtrend near a round number.

Entry price: Set your entry price at the next round number up in a downtrend or down in an uptrend

Stop loss: Set your stop loss at the next but one round number or the fifty level

Take profit: Set your profit target 200-300 pips from your entry price.

 

To practise swing trading with round numbers, register for a free FlowBank demo trading account

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