How to Find Psychological Levels in Forex Trading

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The market moves in patterns and so do prices of various assets. Take the example of the crypto industry. You may have recently come across several headlines citing Bitcoin’s psychological support level of 30k. What it simply says is that the cryptocurrency has shown a strong support pattern at the price of 30k levels earlier and may continue to do so in future.

So, there’s a pattern in play and most trading assets depict these price patterns at different levels. 

These levels become important for traders because they are areas where most buyers and sellers place their stop-loss and target levels. For instance, a currency pair with a support level of $100 tells you that this is the level below which the pair may witness fall and hence it makes sense to place a stop-loss at this level in order to move out of the asset and try to avoid losses. 

Let’s discuss how one can go about finding these levels and how traders can use them to earn potential profits.

Understanding Psychological Levels

Psychological levels are price levels which tend to draw big market attention and typically witness a reaction by price when tested. 

In Forex, these numbers are denoted by round numbers and these same figures frequently act as levels of support and resistance.

What are support and resistance levels? 

Well, as the name suggests, support is something that can help prevent the price from falling further. So, this is the point from where the asset price is likely to bounce back. The psychological support level is always below the current market price. 

On the other hand, resistance is something which can stop the price of an asset from rising further. So, resistance level is the point from where the asset price is likely to fall back. The resistance level is always above the current market price.

Psychological support and resistance work because of fundamental human dispositions such as biases, emotions, etc. that are tied into the way most trade.

The next question is how do we identify these support and resistance levels?

Finding Psychological Support & Resistance Levels

Most trading option contracts expire around a round price. And companies tend to make financial decisions at a certain currency price level which usually is a round number. 

Therefore, currency pairs in Forex have many such levels at different price points. 

Let’s say you want to find the trend for the EURGBP currency pair. This can be done quickly with a few simple steps on your SmartTrader platform. Here’s how…

Open up a new weekly EURGBP currency chart on the SmartTrader trading platform.

Now, place a horizontal line on this chart around the price level from where the EURGBP has shown a history of bounce back. 

If you look at the image below, the EURGBP has bounced back up every time it hit the 0.83319 level. And when you move that level to the nearest round figure, you get the psychology support level for EURGBP at 0.8400. 

EURGBP’s Psychological Support Level

Chart Source: SmartTrader, Market Traders Institute

Once you know this level, you can use it to trade the EURGBP pair more strategically and use it in your technical analysis as well.

A trader who is bullish on the EURGBP will place a stop loss at 0.8400 level when the currency pair is falling to cap his/her losses. Similarly, many traders tend to short the currency pair below support levels to potentially profit from the resulting fall seen after the support is broken. 

In conclusion, psychological levels can help you find entry and exit points to the market as well as managing your trades. They can also complement your other trading strategies and help in targeting successful trades. 

Tian Kriek, Senior Currency Strategist at Market Traders Institute, has recorded a short video on how you can find psychological support and resistance levels and trade them with potential success, which you can Watch Here.

For more such Forex strategies and trades, you can visit Tian’s Analyst On Demand Trading RoomEvery week, within the trading room, Tian will take you through real market conditions and help teach you the keys to being a consistent trader across the board. Just spend a little time in Analyst on Demand and we believe you could see great results for yourself. You can access it by clicking here >>


Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before getting involved in foreign exchange you should carefully consider your personal venture objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial deposit and therefore you should not place funds that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this web page does not constitute financial advice or a solicitation to buy or sell any Forex contract or securities of any type. MTI will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

 

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