Big round numbers and their strong impact on financial markets
|It is a well known behavioural fact that humans have a round number bias. We just like round numbers. During a visit to the gym recently keeping the RPM’s over 100 was a keen aim. If the RPM’s dropped under 100 something psychologically kicked in to give an extra push in order to hit the ‘big round number’.
This phenomena turns up all over the place. Look at the London Marathon finishing times and how they cluster around the big round numbers of 3 hours, 3:30 hours, and 4 hours.
Most of us are very familiar with pricing that keeps under a big round number. Most goods for about £3 will be priced as £2.99. Staying clear fo the ‘£3’ label, even by a penny, means more sales will be encouraged.
Humans love big round numbers as key reference points. You will have noticed this yourself when you say ‘I will close my position when my equity hits £10,000’ or ‘I will sell the stock when it reaches $100’. This means that traders need to be aware of this impact when trading.
The big round number effect
Whenever you are trading, this has a number of implications for placing orders.
For limit orders: Place buy or sell limit orders at, or near, big round numbers.
For a take profit : Place your TP just a few points BELOW a big round number
For a stop loss: Place your SL just a few points BELOW a big round number.
Also, keep a careful eye out for how big round numbers act as key support and resistance numbers. You will see how influential they are.
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