Any trader that has been trading on the stock exchange, even for a short time, uses levels of support and resistance in order to manage the trade. It is common to think that these support and resistance levels occur only from the price. Yet, while the support and resistance levels are important due to the price, some have more importance than others, for example, the support and resistance levels that are known asPsychological Support & Resistance Levels.
How to identify Psychological Support & Resistance levels –
These levels of Support and Resistance do not occur because the perceived importance of a specific price of a stock, bond or security, they occur purely because it is a "psychologically" important number. Although it may be hard to believe, people are naturally attracted to prime numbers, even numbers and whole numbers. Numbers that the human brain considers to be "balanced".
These psychological numbers are usually rounded off. If we take the Dow Jones for example, it was all over the headlines when the index finally managed to cross the major psychological level of 22,000, so much so that by October the 19th (Thursday) the index managed to cross its second threshold at 23,000 only 54 days after that.
Another example, might be a stock that found a psychological support and resistance at whole numbers like $15 and $17, or a stock may find the support and resistance in jumps of $5.
Alongside the simple numbers, the other collective psychological consciousness among all traders, speculators and investors tend to give a huge importance to events as all-time highs or lows.
Why are these numbers so important –
In the trading arena traders tend to give more importance to certain numbers as opposed to others. The human brain tends to have a natural desire to round a number up or down, as a consequence, we tend to subconsciously pick evenly rounded numbers to mark as important points on a chart.
Let's put it to practice –
Take a few minutes to look at the charts below. Try to see if you can find any Psychological Support and Resistance levels.
Weekly Chart -
Daily Chart -
Hourly Chart -
As you can see, the first chart is a Weekly chart, the second is a Daily chart, while the third is an intraday chart (Hourly) – In all the charts it is very easy to identify the Resistance level at $55 and a Support level at $48, while in the third chart, the Hourly one, you can even identify an extra minor Support at $53, since even a small amount of orders will influence the price change immediately, being a short term horizon.
By understanding the importance of the psychology behind the Support and Resistance levels, this will not only improve you as a trader, it will also help you be much more profitable.
Never forget that just like the vast world of trading, as with the charts, there generally is more than meets the eye.
Till next time, Trade Simple…