After every trading week, I like to simply take a look at the previous weeks trading activity, in the hopes of learning something new about the market action. At times this may entail implementing a new indicator into our repertoire of trading tools, and at times, these lessons may emerge on the most basic level.
Todays discussion is about the latter; often times keeping it simple is the best policy. Over the course of the past few weeks, the EURUSD has established a relative trading range between the 1.2700 and 1.2900 large round figures. We may ask, why are these large round figures so important? The market participants from the individual speculator to the hedge fund, pension fund, and large corporation often times will place their respective entry, exit, and stop orders near these round price levels (such as 1.2700 and 1.2800), and inherently create a small amount of support or resistance. In addition, option barriers often times can be found at these price levels, which in turn helps the market, establish these rather clean trading ranges.
Lets take a quick look at this weeks trading action. We can see the EURUSD found short-term stopping points near these figures consistently throughout the week. Note how the market did not stop (exactly) at these price levels, but rather experienced just a bit of spillover; The low near the 1.2700 figure actually rested at 1.2695, as the market then challenged the 1.2800 figure (1.2807), before finding higher support just below this figure (1.2781), and finally reaching a (current) high or 1.2908). We can now see how crucial it is, that we place protective stops with a good amount of breathing room above or below the next respective figure. Personally, I prefer to wait for the market to test, and fail to break beyond one of these price levels. This failure gives us an additional degree of confirmation as a failure to break indicates a greater likelihood of a reversal as the market maintains its current trading range.
