Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 14

The Round Trip

On a hot day, two friends are walking through the park. The temperature is exactly 94 degrees Fahrenheit, and the humidity is high. One casually remarks to the other, “It feels like 100 degrees out here!”

A child wants to go to the movies with her friends. She needs a precise total of $18.35 plus tax for a ticket, a beverage, and a snack. She asks her mother, “Mom, could I have $20 please?”

A woman and her husband are interested in buying beachfront property. The price of the house is listed at $2,095,000. The next day, they present an offer to buy the property for $2 million.

What do these seemingly unrelated events have in common? In each case, someone eschews a more precise figure in favor of a round number.

The truth is that we are all drawn to round numbers, or numbers ending in zero. Wall Street traders are extremely fond of zeros, especially the kind that appear at the end of their bonus checks. Round numbers also have a major role to play in trading.

WHY ROUND NUMBERS CAPTURE OUR ATTENTION

In March of 1999, the Dow Jones Industrial Average approached the 10,000 mark for the first time, with the index teasing investors for about two weeks before finally closing above 10,000. The event was greeted with much fanfare, because it was such an important milestone.

Or was it? More than seven years later, in September of 2006, the widely followed index was trading at around 11,000. Investors who went long at the peak of the Dow 10,000 frenzy had little ...