Q. Do you trade based on psychological numbers?

A. One of the most common questions asked at our training seminars is “What are the key levels on a chart?” There are several key levels to observe when looking for an opportunity to trade from.

One of the most common are known as psychological price levels. For example, when you are filling your car up with petrol, you often aim to round off the amount to £10 or £20, say. These round numbers are also apparent when it comes to trading financial markets. If you observe the charts, you will notice that markets behave in a certain way around round numbers.

Q. What happens at these key levels?

A. As an exercise take a look at the FTSE 100 index chart on the right. Notice what happened when we reached the recent high at 5,900 and also notice the reaction at the 5,600 level.

You will quite often see that markets behave in a certain way as they approach the round number levels. This is what can be referred to as a key psychological level.

For example if the FTSE index has been trading at 5,856 and it is heading higher, then we can assume that it will try to aim for the next level at 5,900. This is then called a resistance level, which the index may struggle to break past.

Q. Can I trade these psychological levels as a strategy?

A. Depending on the type of reaction that takes place at the levels, you can certainly create a trading strategy based on this theory.

Personally I like to trade patterns and there are several patterns that as a trader you should learn. One of the popular types of charts is a candlestick charts.

Within this type of charting method one can look for specific price reversal patterns. You can also look to see if the market fails to break above the key level and then goes on to break below a recent low. You can then assume a move to the downside towards support levels.

These support levels can also be based on the psychological numbers mentioned earlier. Currently the FTSE 100 is flirting with the 5,650 level. Keeping an eye on round numbers can be valuable and it is a simple method to learn. Let’s see how the index reacts in this week’s trading around key levels.

Learn more about technical analysis with Sandy at his free City Index seminars.