Wednesday, May 27, 2015

Big round number (BRN) levels - do they work?

Finally, an update!
I spent the last week examining "big round number" (BRN) price levels on the daily chart, and how price reacts to them. Examples of BRN price levels would be 0.80000, 0.95000, 1.10000 etc. Are these levels respected?
According to my research, yes and no. Yes - if you are trading the majors, or anything paired with the USD. No - if you are trading crosses.
I examined daily price data from late 2012 to May 2015. What I looked for were candlestick wicks rejecting off a BRN level. I found that trading with the short-term trend was more profitable than trading against.

I did a simple backtest, using the setup shown below. I looked for a wick rejecting off a BRN price level, and entered on the break of the high or low of the candle, away from the BRN level. I looked at a variety of R:R ratios.
The results of the backtest...
Profit factor for 2:1 reward:risk
USD pairs (150 trades): 1.36 
Non-USD pairs (113 trades): 1.04
Profit factor for 1:1 reward:risk
USD pairs (150 trades): 1.41 
Non-USD pairs (113 trades): 0.90
My thoughts
There seems to be an edge trading off BRN levels with any USD pair, especially the major pairs.
The USD is the global reserve currency, so if any currency's "value" is to be measured, it's usually against the USD. I think this is what most humans will look at. So if you're looking at the AUD for an economic snapshot, chances are you'll be measuring it against the USD, and not the GBP or CAD. Traders will care more if the AUDUSD hits 0.70000 rather than the AUDCAD.