The Magic Levels Trading Pattern

In the world of electronic and automated trading programs, it still amazes me that psychological levels are still a factor.

In this regard, big figures (round numbers)  are important in trading but not all are alike. I call the more important ones magic or pivotal levels and they end in 0, 2, 5, and 8 (e.g. GBPUSD 1.20, 1.22, 1.25, 1.28, 1.30).consolidation.

When a currency consolidates around a magic or pivotal big figure it offers trading opportunities, both while the pattern continues and once it is broken.

• When a currency trades around a pivotal big figure, it tends to narrow the range until it eventually breaks the pattern. While this consolidation/congestion persists, it provides a range trading opportunities with targets set at or just below the pivotal big figures..
• On the other hand, the longer the pattern goes on the greater the directional risk (trend) move once it is broken. This is the time to be on high alert as positions tend to get trimmed during this range trading period and the market has a more difficult time absorbing fresh buying or selling once the pattern is broken.

The following is an example of this pattern where USDJPY traded on both sides of 150 for 5 days in a row. While this is not considered to be a long pattern in terms of duration, it went on long enough to trigger a response once the pattern was broken to the downside.

So, keep an eye on the pivotal big figure levels as a psychological influence and go on high alert when you see a pattern around them go one for any length of time.