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People are attracted to round numbers.
Think of the 10-year Treasury yield crossing 5%, a stock falling below $100, or gold breaking above $5,000. These levels attract attention. They’re easy to identify, make appealing headlines, and often become important reference points for the markets.
Large numbers of buy and sell orders can also cluster near these levels, along with stop losses. That, in turn, can generate a burst of activity when that level is finally reached or broken.
However, simply breaking through a big round number doesn’t necessarily tell you what’s going to happen next. The more valuable information for a trader comes from how the market reacts.
Does the move accelerate as fresh buyers or sellers jump on board? Does the price immediately reverse and reject the breakout… or does the market barely react at all?
Understanding the difference is vital for a trader. It can prevent you from jumping onto a move just as it’s about to fade…
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When a market breaks through an important level and continues moving decisively in that direction, it tells you that the balance between buyers and sellers has changed.
Momentum builds, trading volume increases, and traders positioned the wrong way can be forced to exit. Triggered stop losses can add more impetus to the move.
Take the 10-year Treasury yield breaking above 5%. The move accelerated through that widely watched threshold and recently reached the 5.3–5.35% range.
However, not every breakout follows through. Sometimes the market briefly breaches an important level before rapidly snapping back.
That’s rejection – and it can be even more useful to a trader than a successful breakout.
In an up move, everyone planning to buy may have already bought the stock. In that case, there are no new buyers to push the stock higher. And in a down move, maybe everyone who wanted to sell had already done so by the time the key level was breached.
Whatever the reason, the market’s inability to hold a breakout tells you that the prevailing move may be exhausted. Traders who chased it can get trapped and be forced to unwind their positions, accelerating the reversal.
Then there are times when the market barely reacts at all. Despite crossing an important level, it neither accelerates nor reverses sharply. Instead, it meanders sideways.
That’s telling you that the supposedly important level might matter more to commentators and headline writers than the market itself. Traders may have already anticipated a stock or index hitting a certain level and adjusted or exited their positions before it happened.
I never buy or sell purely because a market reaches a specific number.
A level identifies where a battle between buyers and sellers might play out. But the price action tells you which side is actually winning.
Suppose a stock breaks through the $100 level. Rather than assuming the rally will continue, I want to see whether momentum continues to build and the stock remains above that level.
If the stock fades and falls back below $100, that’s telling me that buyers’ enthusiasm has waned. When traders who bought the breakout start exiting, that can set off a wave of selling.
I also watch how long the market can hold above that level. A stock briefly crossing a level during the trading session carries far less weight than a decisive close above it. That’s particularly true if it’s followed by another strong move the next day.
Waiting for confirmation means you won’t catch all of the move. But that’s not the objective.
Your job as a trader isn’t to precisely pick a turning point. It’s to enter a trade when the evidence shifts in its favor – and to know where to exit if that evidence starts to change.
Round numbers can influence price action. But in the end, they’re just markers on a chart – not trading signals in their own right.
That’s why you don’t trade simply because a market reaches a headline level. Watch what the buyers and sellers do once it gets there – their reaction tells you where the real opportunity lies.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
