UNDERSTANDING SUPPORT AND RESISTANCE AS A BEGINNER (Part 4)
So, we’ve gone through how support and resistance works when it comes to price action. But what other types of support and resistance are out there? Let’s go over a few of them.
1. Psychological support and resistance
The first type we’ll discuss is called psychological support and resistance.
These areas don’t necessarily correlate with any technical pattern but exist because of how the human mind tries to make sense of the world.
In case you haven’t noticed, we live in a staggeringly complex place. As such, we inadvertently try to simplify the world around us so we can make more sense of it – and this includes rounding numbers up. Have you ever thought to yourself that you have a craving for 0.7648 of an apple? Or asked a merchant for 13,678,254 grains of rice?
A similar effect is at play in the financial markets. It’s especially true for cryptocurrency trading, which involves easily divisible digital units. Buying an asset at $8.0674 and selling it at $9.9765 just isn’t processed the same as buying it at $8 and selling at $10. This is why round numbers can also act as support or resistance on a price chart.
Thus, this phenomenon has become well-known over the years. As such, some traders might try to “frontrun” obvious psychological support or resistance areas. Frontrunning, in this case, means placing orders just above or below an anticipated support or resistance area.
Take a look at the example in the attached screenshot below which shows US Dollar Index (DXY) reverses before reaching 100.
As the DXY approaches 100, some traders place sell orders just below that level to make sure those orders are filled. Because so many traders expect a reversal at 100 and many frontrun the level, the market never reaches it and reverses just before.
Wait for part 5
Lets keep learning and building together 💪