Chapter 10. Psychological Numbers
Figure 10.1. What happens in the markets should stay in the markets.: 2006 "Fxstreet.com. The Forex Market." All Rights Reserved.
The easiest static (horizontal) support and resistance you can find on any chart is also the most effective and relevant, and those are psychological numbers. Dow 12,000 . . . $100 crude . . . currency parity. There is a certain magic to whole, round numbers. These levels are stealth support and resistance since they are levels that many traders commonly overlook because there is not a visible line drawn there.
Think for a moment why Dow 12,000 is so important or even Dow 8,000—any double or triple zero level for that matter. Does it represent an important price point in stocks like IBM, Wal-Mart, Johnson & Johnson, which are heavily weighted into the averages? No. If you and I were to make plans for lunch, chances are we'd agree to noon or 1:00, maybe 1:30, right? Why not 12:08 or 12:42? They are perfectly valid times, are they not? But we human beings think in typically even numbers as we prefer 2, 4, 6, 8 to 1, 3, 5, and 7. We also gravitate to numbers that end in zero. This is how we think and behave, and you had better believe this makes its way into market action and order entry. When the crude oil market made its move towards $150 a barrel, why was this so important, and why did we fixate on that particular number ...