Lets say you are at a shop and you saw the bag that you like and you would like to purchase it. You look at the price tag and you see it cost USD1000. No problem but you would like a discount..who doesn’t right! So you walk up to the shop owner and say I would like a discount and you start a bargain. Would you say I would offer you USD989.90 for this bag? I really doubt anyone would really offer like this. There maybe some “extraordinary” people who would do so but the masses would probably offer something like USD980, or USD990 or USD800 something of that nature This is because our brain is wired to think in round numbers. This round numbers theory is also evident in trading and I will show you in a short while.
This is the EURUSD on the 4 hourly time frame. I have box the the prices into blue and pink boxes. The interval for the prices is at 100 pips starting from the lowest point of 1.1150, 1.1250, 1.1350 going upwards and so on. Prices trade nice in the boxes till it breaks into a new box level and trades within it.
Price first started trading in the upper box marked in blue. Then we had a downward move in price and price ended trading 4 boxes lower. Price did not stay they long and traded one box level above it and ended trading at prices just below the original first where we studied the price.
This is the hourly chart of the GBPUSD. This time however I changed the interval to 50 pips. I started with 1.5350 to 1.5400 to 1.5450 and so on. We see the same movement in prices albeit a smaller interval. This is not something new. Price movements like this has been around a long time. It does not only happen forex but equities and commodities as well.
Above is the 4 hour chart for Amazon (AMZN).
As this is a 3 figure stock, I changed the intervals into USD10 starting from USD285.00. I was able to map out the stock movements quite accurately.
Last but not least we have the Gold to represent the commodities. For the gold, I did not use the 100 or 50 intervals but instead use the USD20 interval instead for the 4 hour chart. I was able to map out the price movement nicely with this interval.
1) Prices move in intervals and those intervals are round numbers.
2) You have to find out what those intervals are.
3) Different time frame, different trading instrument will have different intervals.
Why are there intervals?
My personal view is that at any given time, there is a maximum high and minimum low attached to the trading instrument. This is to prevent extreme price volatility to ensure a safe environment for business transactions. An example is the recent action taken by the Swiss National Bank to remove its a cap on the Euro dollar. That decision which caught everyone off guard disrupted business transactions and trading activities as well as causing major loses to banks, brokers and traders. These moves are not a norm and detested. My experience from working in the fund world taught me not to meddle with government manipulated currencies and I managed to short the USDCHF when it happened instead.
So when does the price moves into the next level. When all transactions are done at a certain level, we will have a strong price move either to the upside or downside and usually such moves are initiated by some news.