We can extend the concept of ‘perceived value’ to explain why resistance seems to occur at trend lines.
Suppose we have three traders (A), (B) and (C) who have been dealing in the same stock at the same time.
• (A) has bought and sold out at a small profit; then bought again and sold when his stop-loss was
triggered for a small loss.
• (B) bought near the highs and was locked-in when the price suddenly fell. He is now holding out in
the hope of reducing his loss.
• (C) shorted and is in profit.
The reasons for buying and selling, and the positions our three traders are holding are irrelevant, except to
show the different perceived values of the stock. We cannot know the reasoning behind the action of our
traders, but we can surely see that each of them will regard the stock differently.
(A) had two trades that showed a small loss. He is not concerned, since better times are surely coming. He
is out of the market and is looking for a new trading opportunity in the stock. He has seen the
weakness since the high and knows he has missed the boat for a short position. He expects prices to
fall and is waiting for a buying opportunity.
(B) is in a panic. He wants prices to rise so he can reduce his losses. If prices continue to fall, he is going
to be shaken out of the market at some stage.
(C) has a good short position and expects prices to keep on falling. He has placed a stop-loss order above
the market to protect his profits.
As mentioned previously, the important point here is the different perceived values and expectations of the
three traders.
• (A) has a price in mind where he might go long.
• (B) is going to reach a point where he can no longer take the pain and will sell at a loss.
• (C) is happy with his trade and expects to make a profit.
These are just three traders out of many thousands watching and trading the stock. Some are hanging on at
a loss, some in profit, whilst others are looking for trading opportunities.
You can probably see that perceived values tend to increase in a rising market and fall in a decreasing
market. Is it possible that if we average out all of these many thousands of hopes and expectations that the
mean limits of the trend lines approximate pain and gain for all these traders?
Observation would suggest that trend lines do work if drawn correctly. It is unlikely that the tendency for
an oscillating price to stay within trend lines is pure coincidence. This would suggest that there must be a
reason for this happening. The evidence of trend clusters (see next section) supports the intuitive
assumption that trends do indeed show areas of support and resistance.
We can extend the concept of ‘perceived value’ to explain why resistance seems to occur at trend lines.Suppose we have three traders (A), (B) and (C) who have been dealing in the same stock at the same time.• (A) has bought and sold out at a small profit; then bought again and sold when his stop-loss wastriggered for a small loss.• (B) bought near the highs and was locked-in when the price suddenly fell. He is now holding out inthe hope of reducing his loss.• (C) shorted and is in profit.The reasons for buying and selling, and the positions our three traders are holding are irrelevant, except toshow the different perceived values of the stock. We cannot know the reasoning behind the action of ourtraders, but we can surely see that each of them will regard the stock differently.(A) had two trades that showed a small loss. He is not concerned, since better times are surely coming. Heis out of the market and is looking for a new trading opportunity in the stock. He has seen theweakness since the high and knows he has missed the boat for a short position. He expects prices tofall and is waiting for a buying opportunity.(B) is in a panic. He wants prices to rise so he can reduce his losses. If prices continue to fall, he is goingto be shaken out of the market at some stage.(C) has a good short position and expects prices to keep on falling. He has placed a stop-loss order abovethe market to protect his profits.As mentioned previously, the important point here is the different perceived values and expectations of thethree traders.• (A) has a price in mind where he might go long.• (B) is going to reach a point where he can no longer take the pain and will sell at a loss.• (C) is happy with his trade and expects to make a profit.These are just three traders out of many thousands watching and trading the stock. Some are hanging on ata loss, some in profit, whilst others are looking for trading opportunities.You can probably see that perceived values tend to increase in a rising market and fall in a decreasingmarket. Is it possible that if we average out all of these many thousands of hopes and expectations that themean limits of the trend lines approximate pain and gain for all these traders?Observation would suggest that trend lines do work if drawn correctly. It is unlikely that the tendency foran oscillating price to stay within trend lines is pure coincidence. This would suggest that there must be areason for this happening. The evidence of trend clusters (see next section) supports the intuitiveassumption that trends do indeed show areas of support and resistance.
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