Understanding what other traders are doing, how they look at charts and how they perceive information is of the utmost importance to your own trading.
Traders who know what trading patterns other traders are using and are familiar with common trading concepts can use this knowledge to their advantage.
Round numbers (price levels that end in .00 or .000) are often a topic of discussion among traders.
The financial media also report cases where an index approaches a large round number.
But only if there is a measurable and repeatable behavioral pattern around these levels can you improve your trading.
In this article, we will look at round numbers in the context of stop loss and take profit placement, as well as support and resistance.
We will also discuss what you can learn about the effect of round numbers by looking at brokerage data.
What Retail Traders Really Do
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First of all, let’s take a look at the live order data of retail traders to see what traders are doing and what approaches they use to trade.
A retail brokerage company called Oanda provides some unique features as well as position and open order data for its clients, which has greatly helped us in exploring the phenomenon of round numbers and clustering order placement further.
The two images below show where Oanda clients place their orders: the green shaded areas are buy orders, and the yellow and red areas are sell orders.
The darker the area, the more orders are at this level.
At first glance, it becomes obvious that a significant number of buy and sell orders are near round numbers.
When the black arrow points to a dark (green or red) area of increased activity, we almost always see a round number.
For sell orders, the clustering effect is even more pronounced, and it appears that traders simultaneously place their sell orders within a very narrow range around the round numbers in question.
History of open sell orders – black arrows indicate order grouping near round numbers – Oanda order book .
History of open buy orders – black arrows indicate order grouping near round numbers – Oanda order book .
The following image shows the currently open orders (limit orders, stop loss and take profit) for several different instruments, and the clustering effect near the round numbers is visible for all instruments.
It is especially significant for EUR / USD. Round numbers almost always coincide with the largest number of orders for all instruments; on some instruments, there is also clustering of orders near numbers ending in .50.
Order book – black arrows indicate clustering of orders around round numbers – an overview of the orders opened by Oanda clients .
It is important to note that the clustering effect is most noticeable in the case of the EUR / USD pair.
This may be due to the fact that this currency pair is the most traded at the Oanda broker, and although there is no supporting data, this instrument has the most non-professional traders.
Stop loss and take profit orders
Using round numbers to place stop loss and take profit is a convenient solution because they are more than obvious and since most traders do not have a clear idea of where to place orders, they just do what seems most logical.
However, the clustering effect of stop loss and take profit orders can have a significant impact on the price flow – more on that later.
Stop loss orders after round numbers
For traders who are long, stop loss orders are grouped below the round number. For traders with short positions, stop loss orders are grouped above the round number.
Impact on the price. After breaking through the round number, all these stop losses are activated, strengthening the price movement. Therefore, when the price breaks through an important support / resistance level and the stop loss is triggered, the movements often become even stronger.
Take profit orders – before round numbers
For traders who buy, take profit orders are grouped below the round number, while for short traders, they are grouped above the round number.
Impact on the price. Before the round number is reached, take profit orders are triggered, as a result of which the price reverses .
Examining round numbers
The quotes below are the results of two studies by analysts, and they support the observable and measurable effect of increasing order flow around round numbers.
This, in turn, confirms what we saw by analyzing the Oanda order book.
Stop loss orders in buy deals are grouped most strongly just above the round numbers, and stop loss orders in sell deals are most strongly grouped just below the round numbers.
Because stop loss orders encourage price movement with a trend, trends tend to accelerate slightly after price crosses the round number and enters the order flow dominated by your stop loss. – Currency orders and dynamics of exchange rates: an explanation of the predictive success of technical analysis – Osler 2002.
Osler (2005) provides evidence that exchange rates tend to reverse at round number levels and accelerate the trend after crossing those levels as predicted.
Round numbers and support / resistance levels
“There is a tendency for round numbers to stop advance or decline … Round numbers … often act as ‘psychological’ support or resistance levels … Traders usually think of important round numbers … as price targets and act accordingly.” (Murphy (1986), p. 67)
After reviewing the research results and using the broker’s data to make sure that there is a clustering effect around the round numbers, we can now examine the charts to see how this affects the price.
If the clustering effect is really significant, look at the charts to see if round numbers should be used as an additional layer of information for your trading.
The screenshot below shows the recent price action on the four-hour EUR / USD chart, with round numbers underlined with black lines.
The pattern is very obvious, and you can find many examples where price action reverses in front of a round number.
As mentioned earlier, take profit orders are often grouped in front of round numbers, and can cause a reversal if the number is large enough.
It becomes clear that not all round numbers are respected equally.
However, as the EUR / USD chart below shows, some round numbers have repeatedly served as important support and resistance levels.
Thus, a trader should not blindly trade on any round numbers that come across to him, but identifying these levels is necessary in order to create his own strategy.
Ideas for using round numbers in trading
Although the research results are very convincing, and the analysis of brokerage data also shows the presence of clustering orders around certain numbers, it is not as easy to use this information as it seems at first glance.
However, the round numbers effect can occur often enough to be used as an additional factor in your trading – pay attention to the word “ additional ” , as when trading exclusively on round numbers you will not get strong enough signals.
Round numbers as support / resistance levels
Do not use round numbers independently of everything else, but watch them fall in the same area as strong support and resistance levels.
When you see a clustering of support and resistance levels near a round number, pay special attention.
Merging factors
In principle, round numbers can be used as merging factors with any methods and instruments, be it Fibonacci, moving averages or price and candlestick patterns.
Read also
Trade price action using support / resistance, supply / demand and Fibonacci levels
When you see a trading instrument / concept that has had clustering around a round number in the past (note that not all round numbers are followed), you can imagine the whole situation.
Optimized stop loss and take profit placement option
As mentioned earlier, in buy positions, traders place take profit orders in front of the round number and stop loss orders behind the round number.
Since this is not a secret, watch carefully as you place your orders for important round numbers.
To protect your trades and avoid stopping or reversing the price before your take profit, you can use additional indentation.
In addition, some traders report that they do not enter a trade in front of large round numbers and filter trades based on this criterion.
