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Secret System: This is How Professional Traders Take Advantage of Psychological Numbers - YouTube
Channel: The Secret Mindset
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Have you ever wondered why prices tend to
stall at certain levels in the market?
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Is this just a coincidence or is there a valid
reason behind this happening?
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Well, this may actually be explained based
on the psychology of traders.
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As humans, we tend to think in terms of whole,
round numbers rather than in terms of uneven
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random numbers.
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This happens very regularly in everyday life
where numbers tend to be rounded up or down
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in order to simplify things.
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By default, most traders have a tendency to
prefer rounded values to odd, random values.
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Because of this psychology, areas of support
and resistance tend to form around certain
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price levels since traders subconsciously
tend to place stops and take profits at areas
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where price is rounded.
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Traders value simplicity and therefore tend
to push prices towards areas where prices
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are rounded.
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This creates areas of resistance and areas
of support at which prices tend to stall.
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Prices will continue to stall at these levels
unless there is a breakout and the market
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sentiment changes.
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In forex trading for example, rounded prices
usually are regarded as those prices in which
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there are double zeroes (or more) at the end
of the price.
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Usually the more zeroes at the end of the
price, the stronger psychological level and
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barrier.
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In addition, short-term intraday traders also
view half way points and price points that
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are multiples of 100 to be rounded.
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If you were to study any price chart, you
would find that areas of resistance and support
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usually form at these price levels.
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Price swings tend to take place at these resistance
and support levels.
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Once the price crosses these invisible barriers,
the price changes from being a level of support
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to being a level of resistance or from being
a level of resistance to a level of support.
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Traders often use these signals as an indication
of what is likely to happen once price approaches
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these psychological levels.
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If price tended to stall at these levels when
prices were going up, then chances are great
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that they will stall at that same price, should
the price reverse and fall.
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This chart shows an area of important support
at a round number turned into an area of resistance
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once the price breaks below the support level.
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And here the round number acting as resistance,
turned into support once the price broke that
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level.
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So if the round numbers are preferred by many
traders, it means that a significant amount
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of buy and sell orders are clustered around
the round numbers.
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Stop loss orders for traders who are in a
long position are clustered below a round
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number.
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Stop loss orders of short trades are mainly
clustered above a round number.
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So let’s think logically: what is the effect
on price: after breaching a round number,
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triggered stop loss orders intensify the price
move.
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Therefore, when price breaks a significant
support or resistance level and stop loss
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orders get triggered, it often results in
even stronger moves.
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What about take profit order?
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Take profit orders of buy trades are usually
clustered below a round number, whereas take
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profit orders of short trades are clustered
above a round number.
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The effect on price?
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Before reaching a round number, triggered
take profit orders reverse price movements.
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I hope you see how round numbers can be used
as an additional layer of information for
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your trading.
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The chart shows the recent price action of
EURJPY and the yellow lines highlight the
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round numbers.
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The pattern is very obvious and you can find
numerous times when a price move reverses
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ahead of a round number – as mentioned earlier,
take profit targets often cluster ahead of
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round numbers, causing reversals if they occur
in significant amounts.
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It becomes clear that not all round numbers
are being respected equally.
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However, as the EURJPY chart indicates, some
round numbers repeatedly act as significant
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support and resistance levels.
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Therefore, you should not blindly trade off
any round number that comes across, but identify
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those levels of greater importance to build
his edge.
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Look closely at this other chart and you might
notice how the price behaves to such round
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levels.
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You can see how well the price responds to
these levels.
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That’s because round number levels take
both retail traders and major banks and big
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market players into consideration.
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When price approaches these levels, the number
of transactions and trading volume both increase.
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These levels of support and resistance can
help you to more accurately predict the movement
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of prices.
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Here are other examples of significant round
numbers around several trading instruments.
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So how to trade using round numbers
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Don’t just use round numbers independently,
but see if they fall into the same area as
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strong support and resistance levels.
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When you see a support and resistance level
clustering with a round number, pay extra
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attention.
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Basically, round numbers can be used as a
confluence factor with any method and tool,
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be it pivot points, Fibonacci retracement,
moving averages or price and candlestick formations.
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When you see a clustering, a confluence with
a round number that has been respected in
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the past, it can help you gain information
about the overall scenario.
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In a nutshell, confluence trading is simply
combining more than one trading technique
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or analysis to increase your odds of winning
on a trade.
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A technical confluence occurs when you find
a trade setup using multiple technical trading
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tools, and all of these independent forms
of analysis indicate a similar directional
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price movement.
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When trading confluence, you don’t necessarily
need to combine complicated technical indicators
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or several technical analysis tools.
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Instead, you can use simple price action confluence
or bar patterns to successfully trade as well.
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And trading with simple price action confluence
is what i prefer the most.
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Here is my favorite trading setup involving
round numbers and moving averages
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A moving average offers great support and
resistance.
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The bigger the period of the moving average,
the stronger the support and resistance area.
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Moreover, the bigger the time frame, the stronger
the support and resistance.
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The general trade plan here is to look for
pullbacks or rally to a zone where we have
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a moving average and an important round number
and take a trade when you see a rejection
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or a breakout of that area.
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Here is EURJPY on the 4h timeframe .we added
the round numbers and a 100 e ma.
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Here’s a perfect opportunity to short the
market in a relatively obvious downtrend.
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The price retraced to the 118.00 level, but
look that right in this area the exponential
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moving average offered some dynamic resistance.
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The price touched the 118.level to the pip
and rejected aggressively the confluence area.
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We had another test of the same area, but
this time, we had a breakout.
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The 100 ma was located below the round number,
and once that area was breached, the price
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searched for the next round number.
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As a side note, look where it stopped.
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At the 120 level, a major point on the chart.
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Here’s TESLA on the same 4 hour chart and
with the same 100 EMA.
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I see several trade ideas on this chart.
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First a great short here, in a clear downtrend.
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Then a buy here, once the price returned above
the ma.
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And another buy here, at another area of confluence
between psychological numbers and the moving
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average.
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Here are other examples of confluence trades:
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There are many ways and tools you can use
to find a confluence of factors to influence
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your trading decisions.
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I like trading confluence because if you require
a few factors to line up to interest you in
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a trade, you will probably be safe from the
pitfalls of over trading.
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Looking for a confluence will keep you out
of the “fear of missing out” and ensure
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you only take planned out trading opportunities
and not be seduced by the price moves alone.
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As with all trading plans, the key is testing
before you decide to put the money on the
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line.
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As always, if you found value or learned something
new, consider subscribing to our channel,
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hit the bell icon and leave us a like to show
your support.
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Until next time.
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