How to understand the human behaviour behind support and resistance levels


support-resistance psychologyOpening and closing trading positions is the main task in trading. Before you decide to sell or to buy you have to conduct a profound market analysis. Various tools available on the Binomo platform will help you in this. But this is not all. Psychology, our emotions connected to our behaviour have also a great impact in the trading world. Let’s discuss psychology and support/resistance levels.

What are support and resistance levels?

Traders oftentimes draw the lines on the chart that are called support and resistance. These lines indicate the levels beyond which the price seem not to pass. Naturally, with time, they can be crossed. Nevertheless, they show crucial points where the trend is likely to pause and rebound.

Support line
Support line on the 5-minute AUDUSD chart

The support is the line that connects the lows, and on which the downtrend may pause and reverse. The resistance is formed by connecting the highs of the price and here the uptrend may reverse.

Different tools may be utilised to determine support and resistance. Traders may draw them with trendlines, horizontal lines or, for example, Fibonacci retracements.

Resistance line
Resistance line on the 5-minute EURUSD chart

Three groups of traders

The participants in the market may be divided into three groups. One group can be named “long”. They are ready to open UP trades so they expect the price to rise. Another group, “short”, wants to open DOWN positions and wait for the price to fall. The last group cannot make a decision just yet and is on the sidelines.

Traders types and their behaviour on the important key levels

Personal characteristics and emotions have a lot to do with the behaviour of the market. Let’s say the price reaches the support level and moves upwards. Long traders will be content and they are likely to buy even more when the price test the level again. Traders from the short group can be disappointed the price is rising and may consider buying to cover. The last group of participants may make their minds and buy in case the price hits the support one more time.

When all groups buy, the support will get stronger and it is probable that the price will rise from it again.

What will happen when the price will break the support and move downwards? This will trigger another chain of responses. The first group of traders do not want to lose much, so they await whether the price will rise to the level that previously served as support and now creates resistance. The short traders are happily adding to their position when the price rebounds from new resistance. The traders from the last group can make a decision to sell now.

A similar series of events may occur when the price reaches a resistance level. They will be, however, reversed. Anyway, this proves how price movement is related to human behaviour.

support level
After resistance is broken, it can act as a support level

There is one more important issue to note. Support often converse to resistance and resistance to support. The levels are approached by the price multiple times and finally are broken and change their function. This can be seen on various timeframes and chart types.

Emotions behind behaviour

Our behaviour is often dictated by emotions. In trading, we experience not only excitement and joy but also anxiety, fear and greed. Herd instinct is also not without significance.

Our traders from each group reveal the whole range of emotions. When the price reaches support and then rebound, traders from the first group are delighted and buy even more. The second group begins to feel uncomfortable. They are anxious about their investments and they may buy to cover. And the last group observes what the majority in the market do and act accordingly.

subconcious trading decisionsA phenomenon known as anchoring can be witnessed when the support or resistance was observed at a particular level in the past and now is expected to be repeated. This is using the information on a subconsciousOpens in a new tab. level and making decisions based on it.

Important key levels from the past (they may be determined by new historic lows or highs, also 52-weeks lows and highs and round numbers seem to fall into memory deeper) create expectations for the future. Traders pay attention to these levels and often feel euphoric when the price nears them again. Emotions trigger behaviour and market responses.

Summary

Support and resistance are important levels that can be drawn on the price chart. They determine some boundaries that price respects for some time being. When support is finally crossed, it often starts to work as resistance. And vice versa.

Traders analyse the price movement around key levels and make their decisions about buying, selling or holding. Emotions play a great role in what is going on in the market. Excitement, fear, anxiety or greed, just to name a few. Some information is absorbed on the subconscious level even. It is wise to observe yourself, your reactions and the market sentiment too.

I suggest you open a Binomo demo account and stay there for a while. Observe the price movement, read the market, open positions, and get to know yourself well. A demo account allows you to trade with virtual cash. At the same time, all the tools are available the identical way as in the live account. Just a perfect place for some training.

Practice and learn!

Bart Bregman

Fulltime Day trading, and help Binomo wiki in my spear time to build an awesome platform to help beginners out there. #digital nomad, traveling all over the world.

Recent Posts

Try for free!

Holler Box
GET STARTED FOR FREE
This is default text for notification bar