Wednesday, July 25, 2007

The Significance of Round Numbers

Two posts ago, I mentioned that, on a short term basis, the Euro was due for a correction. Today, the Euro has melted down, and in this post I will explain one of the reasons why I felt the way I did.

One of the strategies I learned from a book entitled Day Trading the Currency Market, was called fading the double zeros. This strategy is about buying and selling at large round numbers, since these numbers are psychologically important.

Now, in terms of the Euro, there was no round numbers of importance, but in in terms of the US Dollar index, there was. On Friday, I noticed that the USD was approaching 80, and that there were likely many institutional buyers waiting with buy orders at that level. Sure enough, the USD descended right to the 80 level, at which point the buy orders started to rush in.

The chart below is a daily chart of the USD:

Here is a closer look at the USD bouncing off 80, the psychologically important round number. The dashed line represents the 80 level. Another reason the 80 level is so important is because the USD index has bounced off this level so many times throughout the years.

However, it's only a matter of time until this level is broken, and once it is broken, things could get really nasty for the USD. The USD is in a massive downtrend, and, in the long run, it never pays to buck the trend. This fact, that the USD is in such bad shape, will be one of the fundamentals that will drive gold higher for years to come. This is why I have always advocated buying physical gold or silver as means to preserve your wealth, and to participate in the gold bull market. This is why I put ads on my site from Goldline.

Thanks again for all those who commented in my previous post. I hope you'll enjoy the book I sent you. I appreciate that you have visited my site.


DC said...

This business of round numbers and the psychological premise behind it is very intriguing. hmmm....

I've often wondered about it--hell, even took such things for granted as being the case--but the way your post clearly identifies it is rather interesting.

Danny Merkel said...

Hi DC,

I'm glad that you found that interesting.

One thing I should have mentioned on my last post is that it is always important to look for a confluence of indications.

Just because a stock reaches a round number like 80 or 100, for exmaple, doesn't mean you should place a trade.

One of the reason 80 worked so well is because the USD bounced off here so many times in the past.

This fact is why the Euro melted down. The Euro and USD always travel in the opposite directions.

DXB said...

Hello Danny:

what's a good re-entry point into GOLD (SPOT BASIS).

what do you think is what i ask.

what do you think of today's EUR and GBP movements

great site by the way.

Danny Merkel said...

Hi dxb,

On a short term basis, I would not feel comfortable getting into gold right now. There is not enough evidence to suggest a reversal at this time, although it is entirely possible.

The Euro might be at a good time to buy, since it is at its old resistance line this morning. However, I feel that buying it now could be like catching a falling knife.

It's hard to say right now. I'm just in cash for the time being.

I don't follow the GBP.

Thanks again.