Every day the markets are more complex, more international, more liquid, with more people and robots operating in them. All this makes the current markets difficult to understand and above all, they are changing, but the people, the mass, and their way of acting change in a much slower way than the market.
A while ago and from this statement I thought that the best way to operate in the market would be to understand as much as possible people, if I achieved this I would be able to understand the market for a longer period than with any indicator. Today I want to show you some examples of how to understand people to understand the market, I do not say that this is the absolute truth, but it helps me a lot to understand the functioning of the market.
I have once told you about the volume and how to interpret it along with the price to discover how people move, today I want to take one more step and talk about how to create a stand or a resistance.
Technical analysts rely a lot on supports and resistances, but 95% have never thought about what these formations are or why they occur. Skeptics take the opportunity to say that seeing how the price bounces 4 times at the same level is the result of chance, if we apply statistics we will see that it can not be the result of chance, it is as if you play the lottery 4 times in a week, And so week after week, it can’t be a coincidence.
What Is a Stand or Resistance?
Visually it is the price range where the chart has trouble to pass, if you struggle to cross up we talk about price resistance and if you struggle to cross down we talk about price support.
Further deepening the resistance is that price range where we find a lot of offers, preventing the price from going up. Support is the area where there is a lot of demand, preventing the price from falling.
Why is a level of support or resistance generated? I will explain the logic that I find in these movements.
In the areas of resistance we find different interests:
- The trader wants to sell because he believes there is a resistance and expects a price drop.
- The trader who had bought below and arrived at the resistance decides to sell their purchases.
- Traders unrelated to all this buy/sell for other reasons.
So roughly we have two groups willing to sell and another that we don’t know if will buy or sell. People who operate knowing the resistances and supports will never buy right under one, will always expect their break.
After 3 attempts to break the resistance we see how in the fourth attempt it succeeds, the price quickly crosses the resistance zone with many purchases, now we have the following groups of traders:
- Traders who sold and put their Stop Loss right on top of the resistance (I remember in this case the Stop Loss is a buy!!!)
- Traders who sold and hold a negative position are distressed and feel cheated by the market.
- Traders who had their purchases up the resistance and have now entered the market.
- A minority that sells for some obscure reason unknown to me.
In this new price zone, most want to buy and few want to sell, this creates the effect of a very fast price rise when resistance is broken. As you can see it is not a coincidence that happens, if we think about the different traders it is logical that breaking one of these zones will trigger the price so much.
Finally, there are the pull-backs, when the price returns to the resistance and uses support. At this time we have the following traders:
- Distressed traders who sold and now see the opportunity to exit the market with 0 pips, make purchases and turn resistance into support.
- Traders who know that there was resistance there and now take advantage of it as a support. They make more purchases.
- Traders who want to sell would do so in case they break the new support, for now, they do not act.
- As always there is a group of traders who buy/sell for other reasons and are foreign to the whole party.
From this moment on you can apply the same rules for the following levels of support and resistance. I hope it will help you to understand a little more that is the price, why it moves and so you can take advantage of the market.