The Utility of Psychological Levels in Trading

Creating a Strategy Based on Psychological Levels

Sofien Kaabar, CFA


We are often told that a certain support or resistance level is psychological. This generally means a round number or a par-number such as 1.0000 on the USDCHF or $100 on Apple. The question is, if we approach the psychological levels, is it worth initiating trades?

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Introduction to Psychological Levels

Psychological levels form an important part in any analysis. The reason for this is because mentally, they are given more attention than other levels. For instance, which price would you retain more in your mind if you come across it? 1.1500 on the EURUSD or 1.3279 on the GBPUSD?

Clearly, round numbers are the first part of a psychological price. The other part is simply significance. For example, the par-value or par-level such as 1.000 on the USDCHF or 100.00 on the USDJPY is considered a par-level. The basic idea is that around these levels, the market participants may choose to place their orders, hence, a form of reaction may happen.

EURGBP with the psychological levels 0.8500 support and 0.8700 resistance.

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