TSM Trading System: This is How Professional Traders Take Advantage of Psychological Numbers

TSM Trading System: This is How Professional Traders Take Advantage of Psychological Numbers


Have you ever wondered why prices tend to
stall at certain levels in the market? Is this just a coincidence or is there a valid
reason behind this happening? Well, this may actually be explained based
on the psychology of traders. As humans, we tend to think in terms of whole,
round numbers rather than in terms of uneven random numbers. This happens very regularly in everyday life
where numbers tend to be rounded up or down in order to simplify things. By default, most traders have a tendency to
prefer rounded values to odd, random values. Because of this psychology, areas of support
and resistance tend to form around certain price levels since traders subconsciously
tend to place stops and take profits at areas where price is rounded. Traders value simplicity and therefore tend
to push prices towards areas where prices are rounded. This creates areas of resistance and areas
of support at which prices tend to stall. Prices will continue to stall at these levels
unless there is a breakout and the market sentiment changes. In forex trading for example, rounded prices
usually are regarded as those prices in which there are double zeroes (or more) at the end
of the price. Usually the more zeroes at the end of the
price, the stronger psychological level and barrier. In addition, short-term intraday traders also
view half way points and price points that are multiples of 100 to be rounded. If you were to study any price chart, you
would find that areas of resistance and support usually form at these price levels. Price swings tend to take place at these resistance
and support levels. Once the price crosses these invisible barriers,
the price changes from being a level of support to being a level of resistance or from being
a level of resistance to a level of support. Traders often use these signals as an indication
of what is likely to happen once price approaches these psychological levels. If price tended to stall at these levels when
prices were going up, then chances are great that they will stall at that same price, should
the price reverse and fall. This chart shows an area of important support
at a round number turned into an area of resistance once the price breaks below the support level. And here the round number acting as resistance,
turned into support once the price broke that level. So if the round numbers are preferred by many
traders, it means that a significant amount of buy and sell orders are clustered around
the round numbers. Stop loss orders for traders who are in a
long position are clustered below a round number. Stop loss orders of short trades are mainly
clustered above a round number. So let’s think logically: what is the effect
on price: after breaching a round number, triggered stop loss orders intensify the price
move. Therefore, when price breaks a significant
support or resistance level and stop loss orders get triggered, it often results in
even stronger moves. What about take profit order? Take profit orders of buy trades are usually
clustered below a round number, whereas take profit orders of short trades are clustered
above a round number. The effect on price? Before reaching a round number, triggered
take profit orders reverse price movements. I hope you see how round numbers can be used
as an additional layer of information for your trading. The chart shows the recent price action of
EURJPY and the yellow lines highlight the round numbers. The pattern is very obvious and you can find
numerous times when a price move reverses ahead of a round number – as mentioned earlier,
take profit targets often cluster ahead of round numbers, causing reversals if they occur
in significant amounts. It becomes clear that not all round numbers
are being respected equally. However, as the EURJPY chart indicates, some
round numbers repeatedly act as significant support and resistance levels. Therefore, you should not blindly trade off
any round number that comes across, but identify those levels of greater importance to build
his edge. Look closely at this other chart and you might
notice how the price behaves to such round levels. You can see how well the price responds to
these levels. That’s because round number levels take
both retail traders and major banks and big market players into consideration. When price approaches these levels, the number
of transactions and trading volume both increase. These levels of support and resistance can
help you to more accurately predict the movement of prices. Here are other examples of significant round
numbers around several trading instruments. So how to trade using round numbers Don’t just use round numbers independently,
but see if they fall into the same area as strong support and resistance levels. When you see a support and resistance level
clustering with a round number, pay extra attention. Basically, round numbers can be used as a
confluence factor with any method and tool, be it pivot points, Fibonacci retracement,
moving averages or price and candlestick formations. When you see a clustering, a confluence with
a round number that has been respected in the past, it can help you gain information
about the overall scenario. In a nutshell, confluence trading is simply
combining more than one trading technique or analysis to increase your odds of winning
on a trade. A technical confluence occurs when you find
a trade setup using multiple technical trading tools, and all of these independent forms
of analysis indicate a similar directional price movement. When trading confluence, you don’t necessarily
need to combine complicated technical indicators or several technical analysis tools. Instead, you can use simple price action confluence
or bar patterns to successfully trade as well. And trading with simple price action confluence
is what i prefer the most. Here is my favorite trading setup involving
round numbers and moving averages A moving average offers great support and
resistance. The bigger the period of the moving average,
the stronger the support and resistance area. Moreover, the bigger the time frame, the stronger
the support and resistance. The general trade plan here is to look for
pullbacks or rally to a zone where we have a moving average and an important round number
and take a trade when you see a rejection or a breakout of that area. Here is EURJPY on the 4h timeframe .we added
the round numbers and a 100 e ma. Here’s a perfect opportunity to short the
market in a relatively obvious downtrend. The price retraced to the 118.00 level, but
look that right in this area the exponential moving average offered some dynamic resistance. The price touched the 118.level to the pip
and rejected aggressively the confluence area. We had another test of the same area, but
this time, we had a breakout. The 100 ma was located below the round number,
and once that area was breached, the price searched for the next round number. As a side note, look where it stopped. At the 120 level, a major point on the chart. Here’s TESLA on the same 4 hour chart and
with the same 100 EMA. I see several trade ideas on this chart. First a great short here, in a clear downtrend. Then a buy here, once the price returned above
the ma. And another buy here, at another area of confluence
between psychological numbers and the moving average. Here are other examples of confluence trades: There are many ways and tools you can use
to find a confluence of factors to influence your trading decisions. I like trading confluence because if you require
a few factors to line up to interest you in a trade, you will probably be safe from the
pitfalls of over trading. Looking for a confluence will keep you out
of the “fear of missing out” and ensure you only take planned out trading opportunities
and not be seduced by the price moves alone. As with all trading plans, the key is testing
before you decide to put the money on the line. As always, if you found value or learned something
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your support. Until next time.