Proper research and analysis are key to enjoying real success in the Forex market. Technical analysis in specific is a big piece of the puzzle. The right technical analysis can produce Forex signals that alert you to how the market is about to move so that you can better position yourself to capitalize, regardless of the type of movement you’ve identified.
Psychological levels are one form of technical analysis particularly useful for new traders. Better understanding these levels – and learning how to identify them as soon as they begin to form – will help traders significantly improve their return on investment, give them the confidence to make bigger trades, and (hopefully) lockup bigger financial windfalls. What are psychological levels in Forex, though, and how to they work?
Psychological levels are usually round numbers in the forex market where traders set their pending buy or sell orders. These round numbers are likely to print either support or resistance levels, which further strengthens the psychological levels. They are very useful for technical analysis traders to use as a part of their whole trading picture.
What are Psychological Levels in Forex?
Experienced investors that have a lot of time in the market under their belt learn that assets hitting specific prices tend to have predictable behavior.
At least more predictable behavior compared to the volatility of assets as a general rule of thumb, anyway.
To understand psychological levels, you have to understand the underlying psychology and bias of the majority of traders that are involved in the Forex world.
Most traders (including very sophisticated investors) almost always set their “buy” and “sell” orders on round numbers.
It’s not all that common for the majority of investors to have by orders at a 0.6145 level compared to a 0.60 or a 0.61 level. That’s just not the way that our minds are biased to work.
Instead we like to work with round numbers, and that’s why these round numbers are psychological levels that have breakouts and big amounts of activity attached to them.
Understanding this (recognizing that there’s usually a flurry of activity around the psychological levels) can help you better predict and anticipate how a Forex pair is going to behave as it approaches these round numbers.
How Do Psychological Levels Work in Forex?
So what are psychological levels in Forex, anyway?
Well, we are usually talking about big round numbers that are (quite often) popping up as both support and resistance points in market activity.
You almost always see a breakout of market activity around these round numbers. Sometimes with a Forex pair moving up and sometimes with it cratering, but always with real movement around that number.
These are indicators of market activity that allow strategic (and patient) Forex investors to make smarter moves with their money. They can anticipate how things are going to turn out around those round numbers, place a binary bet (the asset goes up for the asset comes down), and give themselves every opportunity to profit.
The Pros and Cons of Using Psychological Levels in Your Forex Trading
Like most technical analysis (not just in the Forex world, but throughout investing in general) there are fits and drawbacks of using psychological levels to inform your trades.
Let’s break those down right now.
On the advantage side of things, psychological levels (and all other key levels) can provide you with advance insight into how currency pairs are going to behave in the immediate future.
These levels are fantastic for identifying potential resistance and support numbers, helping you to better understand how an asset is going to behave before that actually happens – and giving you a chance to get out in front of that market activity.
Another big advantage of psychological levels is that they are pretty easy to understand and identify by even beginner traders.
Other key levels can be more complex and difficult to deduce with real accuracy, but spotting the next round number on a chart (and anticipating what’s going to happen next) doesn’t take a whole lot of experience to master.
Of course, it’s really important to remember that psychological levels – or any key levels, for that matter – aren’t 100% accurate when predicting what’s going to happen in the Forex world.
A lot of traders have been burned by blindly following psychological levels, waiting for market activity to blossom around that next marker – and then it never does.
On top of that, you don’t want to fall victim to pure speculation about what’s going to happen the next time that a psychological level presents itself.
Technical analysis, just like market analysis, requires you to think about past performance, current market trends, and real-time data to let you know (with some degree of accuracy) what to expect from a Forex currency pair.
At the end of the day, though, you are still in the driver seat.
You have to suss out whether or not this trade is the right one to make, whether or not the activity you expect to pop up around the round number is most likely to happen, and whether or not that activity is going to be enough to profit on.
Sometimes you’ll get this right and sometimes you’ll get this wrong.
Over time, though, you’ll get better and better at identifying key levels of resistance and support as they bubble up.
You’ll be able to spot these things further out than you were able to in the past, and the psychological levels will give you at least a little bit of extra information to make smarter moves moving forward.
It bears repeating, though:
Psychological levels (and any other key levels) are not 100% predictive of what’s going to happen. Past behavior is an excellent indicator of what to anticipate, but it is not always indicative of how an asset or currency pair is going to behave this time.
There are a whole host of other factors that need to be accounted for as well.
Make sure you are investing in your due diligence, your market research, and are constantly keeping an eye on your Forex charts while spotting psychological levels. You’re going to need all of this information to make the most informed moves in the Forex landscape.
Don’t trade psychological levels willy-nilly.
That’s a fast way to go belly up.
In Summary – What Are Psychological Levels Within The Forex Markets?
In conclusion, Psychological levels are actually pretty simple. These are round numbers found on charts that act as high-probability areas of support and resistance for traders of all experience levels to consider when trading the Forex or currency markets. Psychologically, everyone has some kind of attachment to these kinds of levels – whether they realize it or not.
These support and resistance levels can tell us a lot about what’s going to happen – over time – with a particular currency pair.
They can help you pick out the best times to buy or sell, and they can give you a bit of extra information that makes it even more likely that you’re going to walk away with a profit at the end of the trade.
Have you used psychological levels within trading? Let me know in the comments down below.