The so-called Round Numbers Theory
Bitcoin is scratching 100K and the so-called theory of round numbers gets our attention. It’s not a coincidence that we first notice or remember numbers that often end in 0 or 00 or 000, etc. Let’s see what it means and how it influences trading.
The theory of round numbers states that the human mind is wired to visualize and think more easily in round numbers. These are those that end in 0, such as 10, 20, 50, 100, 500, 1000, 10,000, 50,000, 100,000, 1,000,000, etc. Numbers ending in 5 are also commonly used for smaller figures, like 5, 15, 25, 75, etc. But the stronger ones are those ending in 0.
How does this influence trading? Traders are people and therefore influenced by this theory that leads us to think first in round numbers. Generally, when projecting profit, we think about winning 1000 USD, 5000 USD, not 1243 USD.
When looking at charts to make decisions, the magic of round numbers appears. If the price approaches a round level, for example, 100, it starts to experience an increase in volume because more attention is drawn from traders. History indicates that these round numbers often act as resistance and support, and when they are overcome, a significant upward movement occurs due to having cleared that hurdle. The same happens if it can’t break through; it becomes a tough resistance and sends the price into a deep correction.
Let’s look at this chart from Carol Osler, a professor who studied the topic in the 1980s.
It shows how this affects trading strategies, where the majority of Stop Loss and Take Profit orders are placed at prices ending in 00 and 50.
A clear example was Bitcoin’s peak at 20K in 2017, and often we can see an anticipation of these numbers because investors tend to get ahead due to the self-fulfilling prophecy, selling something before reaching the exact round number.
With this, I hope that the next time you come across a round number on your chart, you consider it as a relevant level of resistance/support to make better decisions.
