Support Line
A support line is a boundary where traders are not letting the price fall below it. On a trending market, a support line can be drawn where the lowest point touches the next lowest point and so on. The psychology behind a support line is that the more frequent a price low touches the trend line, the more confident traders are in confirming that it is indeed an uptrending market. A general rule when confirming a trend line is that you enter a position when a third low hits the support line which confirms an ongoing bullish market. The third line will also boost confidence on traders who bought the security earlier. These early birds are reluctant to sell because if the rule is satisfied, more traders are likely to buy on the third trend support level.
These mind games go back and forth between the early traders who will not sell and the the later ones that just got in. This sentiment will likely boost prices even further. By the time the price deviates from the trend line, this is herd mentality in action. Early buyers will exit either because it satisfied their profit targets or protecting their hard earned gains. The ones who bought on the third support line will follow the herd. The trend is your friend if you become stubborn you will get slaughtered. The momentum will be weak enough to end the steady trend because traders are not onboard in the same direction any longer.
Stocks | Forex | Options | Economics | Bonds | History | Language learning | Technology | Technical Analysis | Fundamental Analysis
Copyright © 2012 econtrader | Risk disclosure | Terms of Use