Psychologically important levels usually have to do with round figures. An example of a psychologically important level would be the EUR spot approaching 1.30 as opposed to 1.2984. These are levels where technicians need to allow for the greatest degree of flexibility in their analysis. The reason is quite simple but you need to understand the corporate or institutional angle. If you trade on behalf of an institutional firm you are likely financially indifferent over 16pips (1.30 versus 1.2984).
However, from an operational and risk stand point it is easier to account for large bloc trades and or positions on round numbers. Therefore a trader wanting to increase/decrease a position, via an option, forward, or spot will likely leave an order at 1.30 versus 1.2984.
Furthermore when institutional traders want to move massive amounts, just as the EUR is set to enter a new trading level, the 1.30’s, all of sudden that level itself takes on a level of importance. Even if that level is not tied to a technical level. It is in the same vain we discuss major moving averages. They are your basic vanilla average, however, since the market as a whole has become akin to giving them special credence they now assume their own independent level of importance and must factor into your technical analysis.
USDJPY:
The JPY is in the midst of a very volatile Step pattern as the pair creates lower highs and lower lows. Yet we are nearing a psychologically important level between 85 and 86 as there is evidence that the BOJ strongly bid the U.S Dollar last time spot dropped below 85.50. With current spot approaching that same level, how many JPY buyers will there be left? Additionally, you actually may have traders leaving bids at 85 to catch the USD as it bounces should history repeat itself. If the BOJ does not step in then traders will view a breach of that level as psychologically important, as it is a sign that central banks are prepared for this pair touch 80 or lower.
EURUSD:
In our introduction above we mentioned the EUR, so lets take a brief look at this pair. This is pure price analysis and you can certainly add many other forms of analysis, but to highlight price action we will focus purely on price. When price initially dropped below 1.30, see arrow 1, it never recovered and the markets initial response actually pushed price down even further, almost 5 big figures, after giving up almost 4 big figures the 2 days prior. On Friday, see arrow 2, we saw price bounce off the psychologically important level of 1.30. It is very possibly we may see similar sentiment going the other direction on a close back above this level.
NZDUSD:
All commodity currencies have been trading with heightened volatility rendering some basic daily analysis meaningless as intra-day moves have blown through some key levels. .7300 is being watched by market analysts although this level also coincides with a near term Resistance level. However, last week’s in ability to breakout now heightens the sensitivity of market watchers concerning this level at .7300. It should be noted that certain currencies are better known for round figure trading than others and the Kiwi is not one of them. Never the less a psychologically important level remains that until it is taken out and when it is, price action is usually fierce. Look at the chart below to see the markets reaction to trading below a .7000 handle as an example of that point.
Written by bforex.com
