Consider this common situation:

Humans tend to prefer round numbers, and often retail and commercial traders congregate their entry orders at or very near such a level. Dealing desk traders know this. They also know that the amount of money earned by the desk is directly related to the number of these trades that are activated, ensuring them the spread from each trade regardless of the losses or wins of their clientele. As the amount earned by the desk directly relates to their future bonuses and commissions, let’s simply say the dealing desk is motivated to see many such trades enter the market.

So when the price action of a currency pair approaches a round number, where somnolent entry orders lurk, dealing desk traders have been known to use their reserves to nudge the price past that point. The orders are then activated, the desk earns many spreads, and afterwards, they simply close their open positions—often taking the price action right back where it came from.

Sometimes, when a currency pair’s price action repeatedly tests and spikes through a round number, then withdraws, the cause is nothing more than the dealing desk, earning their commissions.

For day traders, this is an opportunity.

For this forex trading technique, a five-minute chart is best, with a twenty-period simple moving average and outstanding support and resistance levels marked. The example shown below is GBP/USD, with the EMA-200 in grey and the SMA-20 in red. The yellow horizontal line is the psychologically important 1.6000 level:

Note how the SMA-20 trails the price action. Note also how, when the price action first approached the 1.6000 level, it surged ahead of the SMA-20 by 20 pips or more, spiked through the line, and then withdrew back toward the EMA-200.

It’s the textbook example of this day trading technique:

1.    Watch for the surge ahead of the SMA-20 as the price action approaches an important round number. When it happens, enter an order against that trend. The example above calls for a long order at 1.6000, betting on the price action to retract back toward the SMA-20.

2.    Set the stop loss at a distance of 15 pips plus the spread. As the spread by this dealing desk for GBP/USD is four pips, the stop would be 19 pips beneath the long order, or 1.5981.

3.    After the order is live, wait for the price action to bounce from the support level by the same 19 pips, in this example, to 1.6019. At that point, close half the trade and move the stop loss to the line in question, or 1.6000. This ensures a profitable trade.

4.    Ride the remainder of the trade to the next resistance level, which in the example is the EMA-200 near 1.6070. Take profit there.

Note that immediately following this profitable trade, the price action again approached the 1.6000 level, surging ahead of the SMA-20. But this time, it dithered about the support level, then punched through and kept falling. It’s a timely example that no technique is profitable 100% of the time. However, the loss would be limited to 19 pips, and is followed by another profitable trade as the price action again bounced from support-turned resistance.