This is a very simple concept. Psychological price levels are those prices with round numbers. For example, 1.2500 or 1.2000, are round price levels and they can act as support and resistance like other technical tools.
They are called “psychological” because they are easy to recognize and remember. They are usually called in the news feeds "handles" like "GBPUSD broke the 1.20 handle". You can see in the AUD/USD chart below how price reacts to those levels, sometimes even perfectly.
Although they look good, you shouldn’t use them as your sole reason to take a trade of course but have a fundamental direction first and then you can maybe structure the trade technically including such round levels as an extra layer of confluence to other technical levels or indicators. You can even use round numbers every 100 pips like in the AUD/USD chart below.
As you can see, they work but they are not perfect and that’s why you should not rely solely on them for your trading decisions. Moreover, in the chart you can also see why using a tight stop loss is a really bad idea because it doesn’t increase your risk to reward but simply increases your risk of being stopped out prematurely. You should get good prices to buy or sell at, but don’t waste your time and money on picking the very perfect price.
This article was written by Giuseppe Dellamotta.