These round numbers, therefore, will often act as “psychological” support or resistance levels. A trader can use this information to begin taking profits as an important round number is approached.
The gold market is an excellent example of this phenomenon. The 1982 bear market low was right at $ 300. The market then rallied to just above $ 500 in the first quarter of 1983 before falling to $ 400. A gold rally in 1987 stopped at $ 500 again. From 1990 to 1997, gold failed each attempt to break through $ 400. The Dow Jones Industrial Average has shown a tendency to stall at multiples of 1000.
One trading application of this principle is to avoid placing trading orders right at these obvious round numbers.
For example, if the trader is trying to buy into a short term market dip in an uptrend, it would make sense to place limit orders just above an important round number. Because others are trying to buy the market at the round number, the market may never get there. Traders looking to sell on a bounce should place resting sell orders just below round numbers.
The opposite would be true when placing protective stops on existing positions. As a general rule, avoid placing protective stops at obvious round numbers.