Nasdaq-100 Index. The Psychological Aspects of Round NumbersIn the complex dance of commerce and finance, price tags play a key role in influencing consumer decisions.
While it’s a fairly common psychological assumption that every penny and cent counts when it comes to getting the best deal, human psychology often deviates from this linear logic. In this educational post, we explore the irresistible appeal of round numbers, and how they often trump other considerations when making transaction decisions.
The Irresistible Attraction to Round Numbers
We do often believe that every penny counts in our transactions. However, research shows a striking deviation from this assumption. In scenarios where people choose a price, such as tipping at a restaurant or donating to beloved author or website, they disproportionately choose round numbers — like $ 5, $ 10 or $ 20 — far more than would be predicted by chance alone.
One could argue that this is due to the rejection of change, a reluctance to waste time on small change, and the unwillingness to bother with complex mathematics. However, even in cases where the exact bill is not an issue (e.g., cashless card payments), the preference remains.
For example, diners faced with a non-round bill (for example $ 34.67) are more likely to give non-round tips ($ 15.33), but only so that the total is a neat round number ($ 50).
Why do we prefer round prices? And what is the psychology behind it?
1) Cognitive simplicity: The human mind is programmed to simplify and seek simplicity. Numbers like 10, 50, or 100 inherently feel “cleaner” and less chaotic than 17, 62, or 84. This desire for neatness gives us a sense of accomplishment.
2) Perception of quality: The marketing world has long capitalized on this preference for round numbers. Brands strategically associate round prices with premium quality. On the other hand, odd prices like “29.99” or “34.99,” while ubiquitous, subconsciously signal here's a discount or a bargain.
3) This preference is not limited to prices. People exhibit this tendency to round in other aspects of life as well. Our repeated exposure to round numbers is common in a variety of contexts, both in everyday life and during financial transactions, which contributes to an unconscious bias toward them. This cognitive ease with round numbers further perpetuates the preference.
The stock market’s behavior and its fluctuations around these significant, round numbers is not a coincidence in general; there is a psychological explanation.
Market Psychology of Round Numbers
When the market reaches round numbers such as 500 or 1,000, 2,500 or 5,000, 10,000 or 20,000, it attracts the attention of both active traders and casual investors who may not even be actively following the market.
As in everyday life, people often use round numbers as thresholds for making investment decisions. For example, some may decide to enter the market if a major index such as the Nasdaq-100 has exceeded 10,000, or they may decide to sell some of their stocks if the Nasdaq-100 has reached 20,000.
These round numbers act as magnets for sellers as they mark important milestones given the relatively high rarity of a round number. If the market has the potential to move higher, it first needs to absorb the selling pressure around the round numbers and establish equilibrium before continuing its move higher.
If we analyze the market behavior over the last decades, we will see clear patterns at round numbers. Let us take a closer look at a few examples.
1) Indian Stock Index, Sensex BSE:SENSEX
Sensex, one of the major market indices in India, has its share of round number syndrome. For example, when Sensex reached 10,000 points in Q1 2006, it experienced significant market activity, with the index fluctuating by as much as 30 percent in Q2.
The same phenomenon occurred at multiples of 10,000.
Thus, at 20,000 points, which the Indian market reached at the end of 2007, the index collapsed by more than 60 percent over the next 4 quarters of 2008.
Later the 20,000 mark has been reached again in the second half of 2010, and the index again suffered a decline of more than 20 percent during 2011.
Later Indian stock market index reached the 30,000 mark in the first quarter of 2015, and its led to a price decline of more than 20 percent in the next 4 quarters, while 40,000 mark in the fourth quarter of 2019 - led to the market decline by 30 percent on the wave of COVID-19 sales.
2) Gold market OANDA:XAUUSD
As in the previous example, round numbers often become key points of congestion for Gold market, when the market tries to break even higher, but the forces of buyers and sellers may be unequal.
For example, spot Gold reached the $ 1,000 mark for the first time in the Q1 2008, which, following the logic discussed above, led to sales and 30 percent decrease.
Gold spot buyers have tried a lot to reach $ 2,000 mark in 2011, but it brought the market down by 45 percent over the next 5 years. There were also a lot of unsuccessful attempts to jump above $ 2,000 in 2020-2022.
Finally Gold spot surged above $ 2,000 only in Q4 2023, its led to further price increase, up to 2500 US dollars per ounce.
3) US stock index, Nasdaq-100 index NASDAQ:NDX
The Nasdaq-100 index approached the 10,000 point mark for the first time in Q1 2020, which could have contributed to the sell-off. In fact, this is what happened, as the market then plunged by more than 30 percent in March 2020, and only thanks to monetary support measures and the reduction of US interest rates to almost zero, the index was able to break the 10,000 barrier by the end of Q2 2020.
Reaching the 20,000 mark by the market index in Q2 2024, as we see, again leads to increased turbulence in US tech stocks and talk of imminent monetary easing by the Fed.
Final Thoughts
1) It is important to note that round number syndrome and increased seismic activity near rounds number is a short-term phenomenon. Once the selling pressure is absorbed, the market resumes its movement based on other factors and develops independently of these already passed milestones.
2) Understanding the market behavior at round numbers can provide valuable information to investors. These round numbers act as psychological triggers for investors, driving their decision-making processes.
3) Understanding this phenomenon allows investors to make more informed choices and understand the short-term fluctuations that occur during these stages.
Roundnumbers
Understanding Price Clustering in the Bitcoin Market█ Understanding Price Clustering in the Bitcoin Market
Price clustering is a phenomenon where certain price levels, particularly round numbers, tend to appear more frequently in financial markets. This study focuses on how price clustering occurs in the Bitcoin market, providing insights that can be valuable for traders.
█ The Psychology Behind Price Clustering
One of the primary reasons behind price clustering in the Bitcoin market is the psychological impact of round numbers. Market participants often perceive prices ending in 0 or 00 as significant, which leads to a concentration of buy and sell orders around these levels. This behavior is not unique to Bitcoin; it has been observed across various financial markets, from stocks to foreign exchange.
For instance, when Bitcoin prices approach a round number like $30,000 or $50,000, traders might expect strong resistance or support at these levels. This expectation can lead to increased trading activity, causing prices to cluster around these key levels. The psychological importance of these numbers can also cause traders to place stop-loss or take-profit orders around them, further reinforcing the clustering effect.
█ Key Findings from the Study
⚪ Clustering Around Round Numbers: The study highlights that Bitcoin prices tend to cluster around round numbers, such as $10,000, $20,000, or $50,000. This is primarily driven by psychological barriers, where traders view these round numbers as significant price levels, leading to an increased concentration of trading activity.
⚪ Impact of Time Frames: The extent of price clustering varies significantly with the time frame. In shorter time frames (like 1-minute or 15-minute intervals), price clustering is less pronounced due to the randomness of price movements. However, as the time frame lengthens (hourly or daily), the clustering effect becomes more apparent, suggesting that traders may be more likely to anchor their strategies around these round numbers over longer periods.
⚪ Differences in Open, High, and Low Prices: The study also finds differences in clustering patterns between open, high, and low prices. High prices tend to cluster around the digits 8, 9, and 0, while low prices cluster around 1, 2, and 0. Open prices generally show less clustering, suggesting they are less influenced by immediate market psychology. This pattern suggests that traders should pay particular attention to high and low prices during trading sessions, as these are more likely to show clustering around key levels.
High Price: This is the highest price that Bitcoin reaches during a specific time period (for example, during a day or an hour). The study found that high prices cluster more around certain numbers, especially numbers ending in 0 or 9. So, high prices often end in numbers like $10, $100, $1,000, or $9,999 because traders tend to react to these round numbers.
Low Price: This is the lowest price Bitcoin hits during a certain time period. Similar to high prices, low prices also cluster, but more around numbers ending in 0 and 1. So, low prices might end in numbers like $10, $1,001, or $5,001.
Why is there a difference?
High prices tend to cluster at numbers ending in 0 or 9 because those feel like natural stopping points for traders.
Low prices tend to cluster at numbers ending in 0 or 1 for similar reasons.
⚪ Price Level Influence: The study highlights that clustering behavior changes with the overall price level of Bitcoin. At lower price levels (e.g., below $10,000), there is more clustering around multiples of 5, such as $25, $50, or $75. As the price increases, the significance of these smaller increments diminishes, and clustering around larger round numbers becomes more dominant.
█ Practical Insights for Retail Traders
Understanding price clustering is crucial for traders because it sheds light on how market participants behave, particularly around psychologically significant price levels. These insights can help traders anticipate where the market might encounter resistance or support, allowing them to make more informed decisions.
⚪ Identify Key Psychological Levels: Retail traders can benefit from identifying and monitoring round number levels in Bitcoin prices, such as $10,000, $30,000, or $50,000. These levels are likely to act as psychological barriers, leading to increased trading activity. Understanding these levels can help traders anticipate potential support or resistance areas where price reversals may occur.
⚪ Adjust Trading Strategies Based on Time Frame: The study suggests that the effectiveness of using price clustering in trading strategies depends on the time frame. For short-term traders, clustering may be less reliable, but for those operating on longer time frames, clustering around round numbers could provide actionable signals for entry or exit points.
⚪ Focus on High and Low Prices: Retail traders should pay particular attention to clustering in high and low prices during a trading session. These prices are more likely to exhibit clustering, indicating areas where traders might place stop-loss orders or where price reversals could occur. By aligning their trades with these clusters, traders could improve their risk management. If you’re setting stop-loss orders, for instance, placing them just beyond a cluster point could help you avoid being stopped out prematurely by normal market noise. Similarly, identifying clusters at high prices could offer better opportunities for taking profits.
⚪ Consider the Overall Price Level: The level at which Bitcoin is trading also affects clustering. For example, when Bitcoin is at a lower price, traders might find opportunities by focusing on price levels ending in 5 or 0. However, as Bitcoin’s price increases, clustering becomes more concentrated around larger round numbers. Adjusting trading strategies to consider the current price level can enhance decision-making.
Price Clustering at Low Levels (<$10 USD):
There is significant clustering at prices ending in 0, but also notable clustering at prices ending in 5, which acts as a psychological barrier at these lower levels. Prices ending with 50 are also frequently observed as significant psychological barriers. Clustering is weaker overall at these levels compared to higher price ranges, but still noticeable at certain intervals.
Price Clustering at Mid-Levels ($100–$1,000 USD):
Clustering becomes more focused on round numbers like 00, 50, and 25. As prices increase, clustering around smaller numbers like 5 or 10 reduces. Larger psychological barriers, such as 100 and 500, emerge as significant points of clustering.
Price Clustering at Higher Levels (≥ $10,000 USD):
At these price levels, clustering becomes even more prominent around major round numbers like 10,000, 20,000, etc. The last two digits 00 become much more frequent, and there is almost no clustering at digits like 5 or 1. Clustering becomes very strong at larger round figures, with a strong psychological barrier hypothesis at play.
Summary of Clustering at Different Levels:
Low Prices (<$10): Clustering at 5, 10, 50, and 100.
Mid Prices ($100–$1,000): Strong clustering at 00, 50, and 25.
High Prices (≥$10,000): Dominant clustering around 00 and multiples of 1,000 (e.g., 10,000, 20,000).
█ Conclusion
Price clustering is more than just an academic concept; it’s a practical tool that can significantly enhance your trading strategy. By understanding how prices tend to cluster around psychological levels, adapting your approach based on time frames, and recognizing the impact of Bitcoin’s price level, you can make more informed trading decisions. By integrating these insights into your trading plan, you’re not only aligning your strategy with the behavior of the broader market but also positioning yourself to capitalize on key price movements. Whether you’re a seasoned trader or just starting out, the knowledge of price clustering can help you navigate the volatile Bitcoin market with greater confidence and precision.
█ Reference
Xin, L., Shenghong, L., & Chong, X. (2020). Price clustering in Bitcoin market—An extension. Finance Research Letters, 32, 101072.
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Disclaimer
This is an educational study for entertainment purposes only.
The information in my Scripts/Indicators/Ideas/Algos/Systems does not constitute financial advice or a solicitation to buy or sell securities. I will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.
All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, backtest, or individual's trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on evaluating their financial circumstances, investment objectives, risk tolerance, and liquidity needs.
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Atom Short tradeHello trader!
Welcome back to another episode with Analyst Aadil1000x and we are back with a new way of trading.
This is a trade of Atomysdt and in this trade, we will take Sell at a psychological round number.
The main reason to Sell Atom is that it's below the 200 D1 moving average indicator which shows its trending bearing and we will only take short entries from psychological round numbers in Atomusdt.
The first Short entry is near 10 and In case if the market moves upside then we will short again with 50% more size than entry 1.
To learn more you can view the education post on this strategy and you can ask questions related to this.
Don't forget to hit the like button and follow to stay connected
Bearish Bias for EURUSD with big pullbackEurusd hit liquidity block and 1.13 is likely to be reversal level for this move. Most likely it will crawl up to cover the newly formed inefficiency before the bearish trend will contoniue to years S1 pivot / TD projection.
Price might well end this year at Quarterly Camarilla L5 (S5) - I havent plotted thatbut it is inside of liquidity block.
Watch even round number levels - they tend to have more efficacy that odd round numbers.
This analysis area based on teachings of Chris Lori and Tom DeMark.
FOR EDUCATIONAL PURPOSES ONLY!
H4/BAT Long Accumulation from $0.50H4/BAT Update: Slowly marking lower, 06:00 UTC, 12/10/2021
Still a long way off from $0.50 w/ 3x $0.05 cent price levels from it
Price crossing under the 200 EMA, along a freshly-created DTL
Buy orders hanging at $0.75 & $0.50 for an accumulation
How to trade round numbersRound numebrs are liquidity levels, where price usually STUMBLES OR REVERSES.
Trends move between round numbers and can be identified using closing prices (line chart).
To identify uptrend you connect DISTINCT higher lows on line chart
To identify downtrend you connect DISTINCT lower highs on line chart
ASIAN SESSION 15M GBP PAIRS ROUND NUMBERS SCALPING STRATEGYDuring Asian Tokyo Session trade:
GBPUSD, GBPAUD, GBPJPY, GBPNZD.
Trading Time Zone: 1 hr before to 1 hr after Tokyo Session.
Trade 15m chart.
Add a "00" & "50" numbers indicator to chart or add them to your chart.
As the new trading day starts, watch how price reacts to those price levels.
This pair price came bullish, had a bearish pullback and then a short bullish continuation.
That allowed you to enter a bearish sell stop @ 2.0600 in the 1 hour before Tokyo Session.
Your bearish take profit is @ 2.0550 so enter a take profit order.
Make a hedging Buy Stop order @ 2.0550 or on a second account enter this order.
Your bullish take profit is @ 2.0600.
Enter a tight 10 pip SL.
Spitting Thoughts : Option ExpiriesI am "exposed" with my short trade and I have my stops (beyond entry-level now, so yay) around that massive option expiry at 1.1000! Sometimes these option expiries give a magnetic effect on price. Would price move aggressively 67-70 pips from current market price in less than 5 hours? I don't see risk event for both U.S and Euro to warrant me a believe that could happen. I have been wrong more often than not when it comes to "guessing" where the market would go (and I do not care about that as long as I have more profit when I am right than when I am wrong) so who knows ey..
for my sake (holding a profitable short trade right now ) , I do hope price would not be pulled by this massive option expiry at 1.1000. Get myself popcorn and I will see what the market would give us.