I will split this idea in multiple aspects. First of all, I will go into EUR/GBP and explain the most important levels on the chart based on the principles of human psychology. Then, I will explain what I believe are explanations for the fact that these levels are so important. Last, I will explain how you can benefit from these concepts.
-- What are these psychological levels you are talking about? --
Look at how BEAUTIFUL all the numbers are on my chart. They are all incredibly round numbers, which match perfectly to the levels of . The levels that I identified are:
- 0.9500 ( 2) - Psychological Level!
- 0.9000 ( 1) - Psychological Level!
- 0.8750 ( 1) - Psychological Level!
- 0.8279 ( 2) - Regular level
Computer scripts don't come up with these round numbers, humans do. You can see human trading behavior at work here, along with human psychology. This is exactly where humans would put their limit orders, or where they will put price alarms. Let's compare the different kind of lines you can draw. First, there are the most regular ones based on past price behavior. A local high will be extend on the chart to indicate that this has been a point where price has historically bounced. This has medium predictive power. Secondly, there are psychological levels without any price action. Simply looking at a chart and seeing EURGBP is about to hit 0.90000 exactly should make you conscious about having psychological resistance. You can add these lines to your chart. Thirdly, there is confluence between psychological and price based support or resistance. Those are the ones I charted here for you. These have incredible predictive power. Keep an eye on them. They are important.
A great way to confirm these level is by zooming out and going back in time. I tried to show it on the chart here, but it would simply get too cluttered if I show you multiple timeframes. If you take these levels, and you zoom out, you see that the same levels are important over and over again. These levels can perfectly predict highs and lows throughout months, even years. This is why you should always add these on your chart!
-- Why do markets have a strong tendency to have these human levels --
A high percentage of all trades are algorithmic, made by computers who couldn't care less about the actual underlying price. They are designed to get profit, and that's it. However, it's not only algorithms at work. A recent study showed that about 20% of all trades is still made by human investors. People are led by their emotions. That's what makes trading hard for beginners, and trading profitable for experts. These are the four main reasons the psychological levels work:
1) When the price surpasses such a psychological level, news articles will be published. Can you see it happening already? "EUR GBP Surged Above Levels of 0.900 in Strong Trading Day." This creates a massive awareness on the asset and leads to an increase in trades and thus .
2) People put their price alerts on these levels. Like quickly mentioned above, people use tools to alert them on price changes. Where do you think they put their alerts? Exactly, on these beautifully round number.
3) People put their stops and take profits on these levels. "Hmm, when should I leave this trade? Surely if the prices go above 0.9500 I would want to be out." Again, this reinforces the importance of these levels.
4) Finally, it creates a self-fulfilling prophecy. Why does trading based on works? Simply put, because everyone else thinks it works. If everyone draws the same lines on their charts, they start to add value simply because of the masses using these supports and resistances.
-- So, How Do I Beat Other Human Traders? --
First of all, think carefully about where you put your limit orders. If the resistance is at 0.9000, don't put your limit order at 0.9010 right above a huge resistance. Be smart, and put it at 0.8990 or even a little bit lower. This reduces your profits only slightly, while greatly increasing the odds that your limit price will be hit. This also works for buy orders, never put those on round price levels. Instead, look for non-round numbers slightly disadvantageous to the profit, but very positive for the chances to get filled.
Then, there is predictive power in these levels. This is all based on regular knowledge. You can expect uptrends to be broken around horizontal resistance, or downtrends to be broken around horizontal support. There is always increased friction around these levels, and your best bet comes from trading within these levels, never across these levels. Near such a level, exit the trade, wait for confirmation of the direction of the price and decide with which position to enter again.
-- And how do I trade EUR/GBP knowing all this? --
We see that the price just got rejected at the psychological 0.9000. We have confirmation of a price reversal at that point, so a logical way to monetize this is by entering a short position. A logical place to exit such trade is near 0.87500
I have made all this knowledge available to you completely for free on Tradingview. Please support my work by giving this idea a thumbs up!
- Trading Guru
This post does not provide financial advice. It is for educational purposes only!
Crypto scanner on Telegram (7600+ members):
Forex scanner (700+ members): https://t.me/ForexScanner100eyes