Round Numbers & what you need to know!
From time to time we will make you familiar with interesting analytical articles from foreign authors. Today we will shed light on the importance of Round Numbers in trading currency pairs and futures.
This article is based on materials from Carol Osler, a professor who has been studying exchange rates since 1986. Their studies are of interest to traders as they contain important statistics on price movements at certain levels.
Carol Osler asks the following questions:
- Does the technical analysis predict the price movement with the help of support/resistance levels?
- Do traders post a larger number of stop loss and take profit orders on round numbers?
- Do the stop orders accumulated at a level reinforce the trend movement?
- Does liquidity influence the price movement?
In short, all the answers are positive. We will not analyse the methods and peculiarities of Osler in detail in their calculations. Those interested in mathematics can study the original source (links can be found at the end of the article). We will focus on practical issues. Namely, how to use this knowledge to generate profits with your own trading strategies.
The article shows the importance of round figures in detail, as Carol Osler’s studies also show.
Does the technical analysis predict the price movement using the support & resistance levels?
Resistance and support levels are the levels at which the price tends to slow down and reverse without breaking that level (Wiki).
Technical analysis is used to identify these price levels. Brokerage firms, news and analysis agencies as well as private experts carry out these analyses. They send the identified support and resistance prices to their customers, publish them on popular websites and on social networks.
For example, here are the resistance & support levels of the EUR/USD currency pair as of July 1, 2019.
Here is data from another news source.
How important are these prices for their use? Carol Osler conducted a study to find an answer to this question.
It rated the resistance & support level using three currency pairs: USD/JPY, USD/GBP, and USD/DEM*. The following records were used:
- Reports from 6 commercial and investment banks;
- information from news agencies and stockbrokers;
- Stock exchange transactions for the period 1996 to 1998.
* Since Carol continued to use the results of her study after the introduction of the single European currency (EUR), she used USD/EUR instead of USD/DEM in her later studies.
For testing, Carol Osler compared:
- Price movement in reaching published support & resistance levels;
- Price movement when reaching the randomly selected support/resistance levels.
If the price bounces more frequently from the published levels or breaks through them than the randomly selected ones, this means that the published levels have a predictive power.
The study results are shown in the following table:
We have marked random prices with the number 1 and a black vertical rectangle. We have marked percentage indicators for the bounce of DEM with the number 2 and a red rectangle. Osler tested each company’s data separately and obtained six records. We have marked the number of trades with the number 3 and the black rectangle.
We can conclude from this table that a bounce of resistance and support levels with the JPY/USD currency pair worked more efficiently. But what is interesting… More than 70 of the resistance and support levels ended with ,00 and 95 with ,00 or .50 – these are the so-called round levels.
We marked the statistics of the published levels with a black rectangle and the statistics of random levels with a red rectangle.
As you can see, the numbers in the last column tend to be 100. This means that round numbers attract traders psychologically. We will return to this regularity in the later sections.
According to Osler’s calculations, 75 of the levelswould be tested again the next day. The majority of them are still efficient for 5 days.
Osler writes that the technical analysis works because the orders of different traders are accumulated at certainprices. The support area is a concentration of demand and the resistance area is a concentration of supply. Round numbers act as technical trading signals. Stock and commodity orders also focus on numbers ending in 0 and 5.
Are most stop loss and take-profit orders placed on Round Numbers?
The next graph shows the percentage of the distribution of stop loss and take profit orders depending on the price round. The horizontal axis is the price scale and the vertical axis is the percentage of orders.
The majority of orders fall on these price levels, which end in 00 and 50. When we say “majority,” we mean the biggest peaks in the bar chart. The grouped stop loss orders can strengthen the trend movement because they are aligned in the same direction. The grouped take-profit orders cannot reinforce the current trend because they are concentrated in the opposite direction.
For example, the EUR/USD pair increases. Those traders make profit that are in long positions. The traders who hold short positions make losses. Once traders hold the short positions, start to close losses, buy them (you need to execute a purchase order to close a short). These purchases will reinforce the already existing growth trend.
When the traders who are in long positions start posting profits, they will sell (you must execute a sales order to close a long). These take-profit trades would thus be directed against the existing growth trend.
Osler outputs separate statistics for stop loss and take profit orders.
Traders book take-profit orders more often at the levels ending with 00, and stop-loss orders at the levels ending with 50. The accumulation of these orders largely explains the resistance levels or technical barriers that we discussed above.
In the above picture, the take profit purchase orders on the price of 00 are almost 8, while the take-profit sales order on the price of 00 is almost 12. Statistically, these prices are much more important than any other.
There are no such explicitly important levels for stop loss, buy and sell orders. They are grouped near 50, i.e. in the range of 40 to 70 percent.
Does liquidity influence the price movement?
When the price tests an area where a large number of pending stop orders have been grouped, the cascade effect begins. Executing a large number of stops on a price range pushes the price further by one tick, where there are also a large number of stops, and so on.
Do the stop orders collected on an area reinforce the trend movement?
According to Osler, significant cascades do not take place more than once a week. And only stop loss and no take-profit orders can lead to cascade or wave price movements. In addition, a massive triggering of stop-loss orders would certainly lead to tails or spikes. Stop-loss orders grouped on the same level amplify trend movements and influence the price over a longer period of time than take-profit orders.
Round Numbers in ATAS
The theory and study of such effects are great. But it is even better if they can be applied in commercial practice.
In this section we will explain how to use Round Numbers in detail.
Round Numbers work not only for currency pairs, but also for stock and futures markets. It is not uncommon for beginners to constantly run into the stop loss, join the movement and… fall into traps. How do I avoid it? ATAS increases the understanding and transparency of the market situation.
Let’s look at an example in the 15-minute Gold Futures Chart (GC). In the first example, we use support and resistance prices taken from one of the analytical resources.
Black horizontal lines are the nearest support areas. Red horizontal lines are the next resistors.
We have marked the supposed stop loss orders with the numbers 1 and 2, because there are zero values here. We have marked the exhaustion of sales with the number 3 – the main volume of this bar is above the resistance level. We have marked the POC (Point Of Control) of two bars on the support with the number 4. This means that the dealers were aware of this area and used it to book orders. The colored footprint chart shows you exactly what happened on the resistance/support prices and who won – buyers or sellers.
And now we’ll look at what happened to the same 15-minute Gold Futures Chart (GC) on Round Numbers. We have marked the Psychological Marks with black horizontal lines.
We tagged the bars where stop-losses were most likely activated and some traders who were waiting for an outbreak – number 1-5. These are pretty thin tails. The red footprint segments in point 1 show that sellers are appearing. Green prints in points 4 and 5 show that buyers show up. Note that the maximum POC candle volumes are not behind the Round Numbers. We have marked a battle between buyers and sellers at the level of 1,395 with a black rectangle. You can use Round Numbers in your trading strategy.
And now we take the Moscow Stock Exchange, as we can use the Open Interest here to understand whether the dealers have opened or closed their positions on Round Numbers. ATAS has a great indicator, the OI Analyzer. It displays the actions of buyers and sellers separately. In our example, however, we use the Smart Tape in history mode. It is very convenient if you want to see what types of trades took place on each price when you were not at your terminal.
Here we have a 15-minute RTS Index Futures Chart (RI) with marked round numbers.
Stop Loss and Take Profit conclude an existing contract. This means that the Open Interest (OI) should not rise. Maybe it’s not the easiest way to detect stop-losses and make profits from the Open Interrest, but no one can forbid us to experiment in search of performance. OI takes part in our
Tape globally. Numbers in the yellow rectangle decrease from 396,882 to 396,710 in just 5 seconds. In this case, we’ll look at the tape from bottom to top, as the previous events are below. Many trades took place in the marked bar, but we were interested in the range 136.300-136.400, where the tail marked with 1 is just below a psychological mark. For this reason, we searched in the marked part of the tape what types of trades took place in this area.
Of course, we can’t physically display all trades of this bar in a chart, but you will always find the necessary information in ATAS.
This part with the market sales of the tape confirms that traders are closing their long positions. They sell. During trading on this day, traders with long positions make losses ranging from 136,300 to 136,400. We found what we were looking for – these are stops behind a round level. It is crucial for us that these are not new sales orders, which means that the price drop will most likely stop and reverse.
Let’s check what happened at the level of 138,000. We see an outbreak and a reversal. Let’s follow the history of the events on the tape. When large players expect an outbreak, they ideally accumulate their positions during the periods of accumulation gradually BEFORE the level. Large players have too large positions to open or close at once in the event of an outbreak. Retailers should monitor not only the round numbers, but also the levels ahead in order to detect growing activity in time.
In our example, such an activity was at the level marked with 1. As for the level of 137,800, sellers and buyers were obviously struggling there. By the way, the POC of neighbouring bars again formed a local level of support in front of a rather round number. Let’s check what happened at 138,000. Here, the traders opened new long positions and the open interest is growing. You will find all trades on the tape on July 1, 2019 from 14:45 to 15:30. The price came back a bit and someone buys 100 contracts at once. And now let’s see how much it is expressed in money. An RTS index futures is 21,658 RUB – approx. 325 dollars. To buy or sell 100 contracts, there must be at least 2.2 million RUB 330,000 dollars in the account. Maybe it’s not the biggest amount in the world, but a beginner definitely isn’t. It is the one who wants and can make money on the stock exchange, so we will monitor such orders.
Both scalpers and intraday traders could find trading opportunities in both areas – 136,500 and 138,000. It was also possible to open trades for both purchase and sale.
Let’s draw a conclusion and formulate how you can use round numbers on the stock exchange to your advantage:
- Open a trade before the level and intercept a short strong impulse of an outbreak and exit after the level. You need skill, accuracy and quick reaction to do this. Maybe it’s not the best tactic for beginners. It is ideal for scalping, but the risk is high.
- Waiting for stops. To ensure that there are new orders, and to enter into a trade along with new orders on a range. Our examples show that the areas are tested multiple times, giving you time to think and decide.
- Open a trade along with the main trend from one brand to the next. The momentum should be rather strong for a large number of new orders.
- Monitor large trades and join the “Managed Money”.
- Do not place your stops directly after round numbers, i.e. not in places where many traders do so.
You should not use the levels that all use, only then avoid being accidentally or intentionally “intercepted” by a stop. You should not use these prices to make a quick profit. ATAS shows you what other traders don’t see.
Notes on round numbers? Let us know in the comments.
Here are the sources of the studies we have worked with: