In the marketplace, one can think of price tiers as psychological checkpoints where prices tend to cluster and have some kind of reaction in that area. Price tiers are specific ranges/levels that market participants pay attention to, and whatever the price tier is can often cause fairly large moves in the market.
In Forex (or stocks or CFD's) those price level tiers are not just a random number. These are great zones where the pressure of buying and selling reaches an extreme and creates distinguishable support and resistance levels. For instance, when the EUR/USD approaches a major psychological price level of 1.2000, this is going to be a price level that traders globally will begin to take notice of with their trading decisions. Price tiers act as a self-fulfilling prophecy for this very wavelength.
Why Price Tiers Matter in Forex Trading
Price tiers are a means of signaling where the market is likely to move next. Without them, you could trade without a clue and simply react to every price movement without broadening your focus.
Identifying potential trend reversals is probably the most apparent benefit. If a currency pair is in uptrend and suddenly reaches a key price tier, which is a place where the market has previously made a turn, the market is more likely to reverse or stall; this is your signal to either take some profit or tighten your stop-loss or get ready for a potential trading opportunity in the new direction.
Support and resistance analysis are considerably more potent when you factor in price tiers, as a tier that has held multiple times in the past is worth consideration over a random price level that was drawn on the chart. This is the place where bulls and bears have fought before; those fights affect future price behavior.
How to Identify Price Tiers in Forex
Start with the easiest method - just look at round numbers! Human psychology inherently likes round numbers as we have all been trained to pay attention to nice, round figures. Numbers that end with 000, like 1.1000 or 1.2000, or 50.00 and 150.00, will naturally draw your attention because these are natural price points where orders will be clustered as magnets. What trader is not looking at USD/JPY at 150.00? It definitely functions as a key battleground, and USD/JPY is a pair that has been watched by traders around the world.
Online retailers clearly understand human psychological behavior when pricing items on sale for $9.99 instead of $10.00. Your brain, like everyone's else, does form a response to each cent, and a rounding mechanism takes place every time the price is $10.00 and you really are "saving" $0.01 by paying $9.99. In forex, the opposite happens. It is not the $0.01, but the round number itself that triggers the psychological response.
Price Tiers Based in Forex Trading Strategies
This is probably the bread and butter approach for most scalpers and other types of traders. You enter a trade near specified price tiers (which may range from swing highs and lows, to round numbers to price tails) anticipating that the support price tier will hold for when you buy (purchasing opportunity) the market bounce off the price level, and the same for resistance to stop the upswing when you sold.
Consider a situation where EUR/USD is coming up to the 1.2000 level from below. You don't just look to buy at 1.2000; instead, you will wait for clues that support is holding, whether through a bullish candlestick pattern, a reduction of selling momentum, or an outright bounce.
Risk Management with Price Levels
Price levels are an excellent tool, but they will not predict the future. Markets are unpredictable, and risk management is not an option, it will be the difference between being successful in the long run and blowing up your account.
Why set the stop-loss just below the level rather than exactly at the level? The market often makes a rapid spike through a level (stop hunts) before heading back in the direction of the original trade. By setting the stop-loss a bit past your defined level, you are providing protection against being faked out while still controlling your risk.
Conclusion
In summary, price tiers provide structure to your learning about market behavior to aid in the decision making process surrounding your trading. They provide a structured area where market psychology intersects with technical analysis while providing definable levels to develop strategies.
If you're new to this, start simply. Track the round numbers of a single currency pair and see what happens as price approaches these levels. Do buyers come in as support? Does resistance hold? Once you are comfortable with this basic observation, add volume analysis and technical indicators to improve the determination you have for levels.
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