# The psychology of technical analysis



## stockGURU (17 January 2015)

What causes support and resistance levels to be respected by the market? How does human psychology influence technical indicators? Why do chart patters occur time and time again with the same or similar result? Is technical analysis simply a way of analyzing human behavior in the financial markets?

There has been a lot of discussion about technical analysis theory at ASF, but I'm interested in the human psychology behind it. 

Double tops, double bottoms, filling the gap, breakouts, capitulation. How are these and other patterns and principles influenced by human psychology? Can you profit from predicting crowd behavior and human emotions?

I'm very curious about how technical analysis and human psychology connect and interact. Would be interested in the thoughts of others.


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## tech/a (17 January 2015)

stockGURU said:


> What causes support and resistance levels to be respected by the market? How does human psychology influence technical indicators? Why do chart patters occur time and time again with the same or similar result? Is technical analysis simply a way of analyzing human behavior in the financial markets?
> 
> There has been a lot of discussion about technical analysis theory at ASF, but I'm interested in the human psychology behind it.
> 
> ...






> What causes support and resistance levels to be respected by the market?




I really don't know *WHY* they and a myriad of other patterns happen---I've gone beyond needing to know.

This IS a great topic.

I too have often pondered the questions that arise.
I see them just as you do. They occur far too often to be purely random unrelated to price action around them.
They succeed and they fail. They don't have to succeed more often than they fail to be useful.
How long are they useful in their context.
Are they purely useful in mathematical terms only or do they simply plot a landscape that those who can read it (Spot familiar faces in the moving crowd) and then take advantage of it?


*Psychologically*
For ME.

(1) It gives me a start and finish point.

(2) It gives me the way to test and gain definitive answers to*SOME* of my questions.

(3) It paints a wonderful picture that can often be read with uncanny accuracy.

(4) It can also paint a picture which you can see is something to Keep clear of.

(5) It gives me the ability to identify opportunity and recognize danger in under a minute.(I'm  time poor)
Price action doesn't lie to me (Right there and then)---it maybe wrong in the longer term buy I'll see that to.

(6) Its Visual--I'm visual.

(7) It shows me to the Crowd.---the smart money---or more often the *DUMB* money!.

(8) I can practically apply it. (So important--you have to get past theory!)

(9) I know when I'm wrong quicker than any other form of analysis.(Giving me the opportunity of getting out well before my investment has to become a bottom draw disaster). Also giving me the opportunity of getting back in when its clear its time to get back in!

(10) It allows me to sleep with a degree of comfort at night---sure there can be outliers!

(11) I can find prospects through searches in minutes rather than days or week.

(12) I'm not influenced by news/reports/directors activities or peoples opinions.

(13) There are only a few that follow my path and those that do are different yet similar.---that's a good thing.

(14) When you've done it long enough you'll actually develop your own technical indicators and patterns not seen in books or discussed in papers---here true uniqueness(*EDGE*)lies.




> Can you profit from predicting crowd behavior and human emotions?




*Yes you can.*


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## explod (17 January 2015)

This has the potential to become a great thread,  not only for those on the way but for experienced traders also. 

From research I undertook years ago on crowd behaviour I learnt that humans are deiven by the excitement of being involed within the group.   Would like to say more now,  but my turn to cook dinner. 

One simple one,  which you have probably discussed on the forum TechA,  is such things as increasing volume and slowing trend,  a sure sign that large numbers are leaving and assisted by the other crowd exited about the run and wanna be in it.


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## tech/a (17 January 2015)

explod said:


> This has the potential to become a great thread,  not only for those on the way but for experienced traders also.
> 
> From research I undertook years ago on crowd behaviour I learnt that humans are deiven by the excitement of being involed within the group.   Would like to say more now,  but my turn to cook dinner.
> 
> One simple one,  which you have probably discussed on the forum TechA,  is such things as increasing volume and slowing trend,  a sure sign that large numbers are leaving and assisted by the other crowd exited about the run and wanna be in it.




Or vice versa


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## tech/a (17 January 2015)

This 130 page PDF maybe helpful.

http://www.volumespreadanalysis.com/tradeseqexp.pdf


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## tech/a (18 January 2015)

I don't want to dominate this thread but there seems to be a lack of contributions for discussion.

So Ill run my slant on some before going dark.

*Support and resistance*.*ALSO** Pivot highs and lows
*
3 things can happen at support and resistance/Pivot Highs and Lows.

(1) It can succeed---hold
(2) It can fail---continue
(3) It can be tested----consolidate

*Psychology*

(1) This is where price is seen as over bought or over sold price will fall back into a range often back to support or resistance

(2) Buyers/sellers see price at this level as too expensive or too cheap so are willing to take lower prices or bid higher. Price will either Blast through (More buyers flooding sellers) break through on low volume (Sellers have withdrawn). How price moves through these areas is important to indicate effort and in the formation of important patterns going forward.

(3) Testing
Buyers and sellers looking for direction at this point---flushing out parcels and feeling if a longer term move is likely or over. Price will often fall short or creep over a pivot level to set up a support or resistance level where price will stall and reverse---or stall and continue often setting off stops. Being able to read testing of highs/lows and resistance is one of the most important skills a technical analysis can gain for discretionary trading.

*Patterns Micro (Continuation) Including single and multiple bar patterns*
In no order of importance

(1) Rectangles
(2) Triangles
(3) Flags
(4) Pennants
(5) Arrows
(6) Pop Guns
(7) The Ross Hook
(8) Inside Bars
(9) Double Inside bars
(10) Outside bars.
(11) Control Bars (similar to 15)
(12) Bottoms/Tops double and triple
(14) Throw backs and pull backs
(15) Set up Bars (Similar to 11)
(16) All VSA INDICATORS. (See book reference above)
(17) Extremely High Volume bars and the RANGE of those bars
(18) Extremely Low Volume bars and the range of those bars

Some of these represent small micro consolidations---anything after 3 bars is in that category for me.
Its *VERY IMPORTANT* to read psychology in the *CONTEXT* of the chart. 
Youve found a face *(Leader)* in the crowd now you need to know how its trying to move with that crowd.

It will take far to long to place up a chart and running commentary on each of the above but I will do one here as an example.

This is the DAX 3 min Last Friday.

I've not named everything for clarity but have marked what I feel are important in the landscape of the chart.
Those things that would have me interesting and making decisions from (If I were at the screen).

*Click to expand*




While not exhaustive this is at least a good start--I think.

Over to those interested in this type of analysis/and trading.


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## pixel (18 January 2015)

tech/a said:


> I don't want to dominate this thread
> 
> [...]
> 
> Over to those interested in this type of analysis/and trading.




Keep dominating, tech/a: you're doing a sterling job - as usual 
(Thanks also for the VSA pdf; I'll take it into the upcoming holiday break, in case I get bored.)

I've rarely considered psychological hypotheses to index charts, even less to charts with ticks shorter than a day. Funny really, because I have applied the same chart templates, and looked at the same patterns and signals, over all time periods, be they months, days, or x minutes. Ditto for all instruments from stocks to currencies to indices.

From discussions with brokers and system developers, I formed the opinion that a significant reason for "history repeating" lies in the fact that a significant number of traders and brokers look for the same signals. The simplest of those commonly used signals is "Two MA crossing". 
Many years ago, before online orders were commonplace and when a trader had to phone orders through to a broker, I spoke to the instructor of a Broking firm. He explained the reason: "It's so simple; easy to see, easy to understand, so every desk jockey can apply it." Not very flattering for the general broking fraternity, but maybe credible for that very reason. And definitely a reasonable starting point to analyse some psychological factors of history rhyming.

Hypothesis 1: *The Followers*
Humans *want* to see and be guided by patterns. Therefore, when price approaches an obvious trend line, previous support or resistance, they are inclined to act the same way as before. Buy at support, sell at resistance, follow the big volume, ...

Why doesn't it "work" all the time?
Hypothesis 2:*The Leaders*
Smarter humans gain an understanding of crowd behaviour and anticipate how the followers will react at certain price levels. The more money an institutional investor can throw at a particular stock or market, the more he can pay to attract and retain smarter staff, who are able to understand and exploit likely mass reactions.

How often have you seen events like the following:
A share trades towards a support or resistance level, or an old open gap. Volume dries up towards the end of a day's session, then one trade - possibly even a single share - hits the level, closes the gap exactly. Depending on the "smart money's" intentions, this is usually followed by either a bounce or a false break.


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## CanOz (18 January 2015)

I subscribe to the view that shorter time frame (ie. less significant in size and ability to move the market) traders or players dominate the 'technical' part of the markets. I believe that the underlying structure of the market tends to provide the areas of 'support and resistance' and depending on who is playing, we see different results, reactions and events around these levels.

For example, if the market is reacting to 'unchanged' (prior close) then the day time frame is likely in control...the theory being that a big hedger could not give a toss about where the market closed yesterday when executing a large position. If on the other hand the market challenges a monthly high and massive amounts of volume come in, it could be that higher time frame players are in the market either buying to push the market higher or selling into the strength to get the best price and most liquidity....if you have spent much time in front of the screen (watching the orders come in) then these theories tend to resonate extremely well.

Jim Dalton provides some great perspective on this in his books and his video series titled "Field of Vision".... There lots of free vids on YT from him as well. There are lots of little gems pulled from his years of experience in the markets.

He sometimes will draw a trend-line on a chart (rarely) to highlight where the retail crowd will have their stops and to expect a stop run there...

Anyway, interesting discussion, great to hear lots of different views.

CanOz


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## ThingyMajiggy (19 January 2015)

tech/a said:


> This 130 page PDF maybe helpful.
> 
> http://www.volumespreadanalysis.com/tradeseqexp.pdf




Link isn't working


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## pixel (19 January 2015)

ThingyMajiggy said:


> Link isn't working






> The resource you are looking for has been removed, had its name changed, or is temporarily unavailable.



Copyright concerns maybe?


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## Joe Blow (19 January 2015)

ThingyMajiggy said:


> Link isn't working




I just went to the front page of the website and it appears as though it is currently offline.


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## tech/a (19 January 2015)

Bullkowski puts out some good stuff on psychology here.

http://thepatternsite.com/Psychology.html

*MUCH BETTER VSA DOWLOAD HERE.(Better material)*

http://www.tradeguider.com/mtm_251058.pdf

Will take a while to open as its a large file.


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## debtfree (19 January 2015)

Just tried a Google search for 'Volume Spread Analysis PDF' and up it comes.

Just seen your post Tech and that link works, thanks.


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## tech/a (21 January 2015)

This thread died instantly--pity.


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## CanOz (21 January 2015)

tech/a said:


> This thread died instantly--pity.




Heya, i put in some perspective, never got a comment. I thought it might get some discussion going....


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## tech/a (21 January 2015)

CanOz said:


> Heya, i put in some perspective, never got a comment. I thought it might get some discussion going....




Can

I'm of the opinion that we (technical traders) are indeed rare. 
Which in the end I'm actually glad.

I also believe that very few are prepared to spend the 10000 hrs
doing their apprenticeship.
That to I'm also glad of.

Still enjoy your input and anyone else's that comes along/Pixel/Gordon/Boggo/Rimitus/PAV.


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## notting (21 January 2015)

Here's my psychology tip.
Know thyself, OMG, how lame and unoriginal.
OK, OK.
How?  
1. When you start trading, trade well within your financial capacity with real money. Because if the fool persists in his folly he will eventually become wise. So you have to get good a being a total f*@#ing loser.

2. Revelation - Yes you are the worst God damn trader ever.  You are a total basket case, with the worst luck, the market is F*@#$ed, rigged.  You cannot win. Give up and die.

Hang on a sec, if that's the case, then if I, then I Hey!! -



3. Re-wire and your a legend and *rich!*

4. Technically watch the fibs and the resistance levels, to have a bit of an idea of where things are at.

5. Still use stops (even losers get it right sometimes)


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## burglar (21 January 2015)

tech/a said:


> This thread died instantly--pity.




Don't know what this thread wants from someone like me.

I have a huge interest in topic.

Its just that, when I look into the crowd, ... I see a crowd!
Descriptions of patterns fall into 2 sets for me.
At least 90% are jargonised, lacking clarity.

I read this description of the "Cup and Handle" once, and it stuck.



> The tiny-money bloke holds in faith until the share price reaches the price he paid.
> This brings him to the lip of the cup.
> He and his mates rush to sell which makes the handle!
> 
> ...


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## Boggo (22 January 2015)

I could write an essay in trying to explain my thoughts on what I think we are discussing and I would probably confuse both myself and anyone trying to read it.

I will use a daily chart of MLX as an example of how I see what may be referred to as psychology (if I cut this post short it is because I am expecting a phone call that will require me to drop everything).

Is there such a thing as psychology in applying technical analysis or is it something to ignore in operating a mechanical process.
Having said that there is always a "feeling" when you see something or when you don't see something where technically there is a scenario or setup on a chart.

Personally I have noticed that if I go OS for a month or more I find it takes a while to get that "feeling" (psychology ?) back again when I try to pick up where I left off.

MLX chart. On this chart after a significant decline followed by a turnaround and breakout of a notable level between 76c and 78c.
Why did this happen, was it a purely technical process or was it rumour or news based.
For me personally I really don't care but when I look at it as a potential candidate I also need to have an idea of where it may run to, ie resistance, previous pattern etc.
Now I see a point where it may meet resistance at a previous level (1.08 to 1.10 in this case).

Is my target area and that of possibly hundreds of others a sensible technical target area or is it now a perceived psychological area supported by "the crowd'.

Next area that always generates an argument is whether the technical approach can be a step ahead of the stock news or reports, in the case of MLX I definitely think technical as the sellers now seem to be in action after the news at a level which could be seen depending on your viewpoint as either technical or psychological.

MLX briefly, chart turns up, breaks above 76, runs to target area, news comes out and sellers capitalise.
(tech/a can probably elaborate on the volume/price behaviour on MLX at the moment)

I think in this example we have got all the elements, technical, psychological and fundamentals.
At the risk of starting an argument I believe that what is referred to as psychology is often just a lot of people applying the same technical process.
_[I hope that what I have written makes a bit of sense - hectic surroundings here at the moment]_ 

(click to expand)


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## ThingyMajiggy (22 January 2015)

How much psychology even is there anymore? With the common idea that 80% of market volume is computers/algos, there wouldn't really be any psychology, just a predetermined set of rules that they are all trying to follow and compete with one another in? I guess they would take advantage of that in their rules, say a nice round figure coming up, people expect it to react to it...."because its a round number". 

If things are actually manipulated they would surely take advantage of this, therefore rendering it invalid to take advantage of the psychology of the round number, its more likely to push through the round number, catch everyone out then go back through the round number again to where it was, proving the "psychology" of the round number correct on the longer time frame, but screwing those uninformed on the shorter time frames. Probably why people say it's not really possible to scalp these days. 

I think that because this is the age of the machine, we are less likely to see some "big players" entering the market and an increase in accumulation and distribution phases with algos hiding their intentions and drip feeding their orders into the market, rather than playing games like it used to be, so maybe these psychological areas will take longer to form(unless the market as a whole moves faster) because there will be jobbing and playing around at those levels for prolonged periods before things take off, 1000 1 lots instead of 2 500s type thing. 

Anyway, just blabbering on. Interesting topic this whole psychology thing


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## tech/a (22 January 2015)

> Its just that, when I look into the crowd, ... I see a crowd!




This I believe encapsulates many like you B.



> How much psychology even is there anymore?




This is also a valid observation.
But it can also be one which is explored by quants that write algo's.

One of the ways to develop a statistically viable is to find readily available price/volume/pattern or combination of which repeat often enough to give a positive expectancy.

*I've actually* come to the conclusion that many patterns and price movements happen repeatedly *WITHOUT* human thought process. Like a part of nature---they keep happening but you just cant put a rhyme or reason to it. 

I cant explain why CLEAR Elliott wave patterns form often enough to be of valuable help when trading.
But they certainly happen.


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## burglar (22 January 2015)

tech/a said:


> This I believe encapsulates many like you B ...



It doesn't frustrate me yet.
I don't give up.

I've come too far!

Four years ago, I would continuously ask , 
"What just happened?"
"Shouldn't they go up on good news??"

Now I recognise what drives share price.
The net effect of a diverse group of people.
And T/A is the study of their behaviour through charting and patterns.
I will endeavour to learn more, albeit slowly.


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## tech/a (22 January 2015)

*B*

I look at the crowd as the Bars on the chart.
Crowds and charts will do the following.

(1) Nothing--they will be leaderless.
(2) Strong leaders will take control and point a direction which is adhered to in an orderly fashion by those in the crowd.
(3) There will be panic and confusion diving one way then the other.
(4) Small or larger groups will disagree with the crowd.
(5) The crowd will over power the minority.
(6) Some will stand out from the crowd.
(7) People will leave the crowd and not return.
(8) People will join the crowd and not leave.
(9) People will come and go.

When your next watching a chart ask yourself
What is the crowd doing long term
What is the crowd doing this week
What is the crowd doing now.

How does this effect the way Ill participate with the crowd.
Do I want to be in this crowd---and for how long?

Take the Money out of it---you'll be surprised what you find!


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## Wysiwyg (22 January 2015)

Not the crowd I think but the weight of securities being controlled by an individual or fund or funds. For example one holder of a million $1 shares could easily introduce fear to the majority of other holders by placing an order into the market. So the crowd as such does get prompted to react in some way. Stimulus - response stuff.


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## minwa (23 January 2015)

ThingyMajiggy said:


> How much psychology even is there anymore? With the common idea that 80% of market volume is computers/algos, there wouldn't really be any psychology, just a predetermined set of rules that they are all trying to follow and compete with one another in?




That is still psychology. The set of rules are determined by the human mind, who had psychological decisions when programming it. Emotions are removed for EXECUTION only but the psychology is still there when the rules were determined, and when and for how long these set of rules/algos/systems will be run and turned off. Even if its set to run 24/7/365 that's still a human decision made to not turn it off and there is always the possibility it will be turned off. 

So until artificial intelligence has freedom of will and make its decisions itself, human psychology will always remain in the markets. Even if that happens - its still AI psychology.


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## tech/a (23 January 2015)

Wysiwyg said:


> Not the crowd I think but the weight of securities being controlled by an individual or fund or funds. For example one holder of a million $1 shares could easily introduce fear to the majority of other holders by placing an order into the market. So the crowd as such does get prompted to react in some way. Stimulus - response stuff.




Yes this is true.
I see it in the Futures market all the time.

We are currently doing a great deal of work on.

Number of trades V Volume being traded.
Does a fall in Trade volume but at the same time 
an increase in Contract numbers in a direction influence
future price and for how long.

Like the DAX last night.




We have data on how many traders traded that volume.
Was it 2000
or 20?

These markets are moved by big players there is proof everyday.

How to trade against them?
Trade WITH them.


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## Pnut (29 January 2015)

stockGURU said:


> What causes support and resistance levels to be respected by the market?




You should also consider that trading has been around for many hundreds of years and that computers have only been around for a brief period. W.D.Gann claimed in the 40's or 50's that one day man would have a machine that could trade the stocks and commodities. Naturally his peers ridiculed him and talked about him behind his back. 
In the early 1900's Livermore referred to Gann as some sort of pet freak they kept out the back, due to kindness and the charts he was using to trade with were fantasy and the only true way to trade was through the ticker. 

My thought is, it is simple for you to see a double top or support and resistance. But the farmer or share holder who makes his money buy selling the cotton or grain or selling his holdings of a company can only see the price he has paid and the price he wants. Mix that with the price he has seen over the years or what he recalls from the top of his head. $1.80 for beef maybe a better price then he has ever received or the AUD is low so it would translate into $2.20 which to him is a good price. 

So for example the guys whom make a living out of mining or processing copper, know's that $2 lb is a very special price and they respect that level. You easily can see the levels of respect because you have a "Time Calculator" of the underlying asset in front of you depicted as a price chart.

My point being that you can see it on the chart but it was happening before charting even started. If you look closely at the levels you will notice they are a round number or a special number that reflects an underlying fundamental that you may not know. The $2 copper is a good example. Glencore Finance put's in a special clause to most loans for copper / gold mines that if the price of copper falls below $2 they can call the finance and cancel the loan. This is how they have stolen so many deposits in Australia while the incompetent watch dogs have looked on. Not even a mention that Glencore is the biggest copper trader in the world and they can easily manipulate the price.


My thought's only.
Pnut


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## Mdean (19 February 2015)

tech/a said:


> This 130 page PDF maybe helpful.
> 
> http://www.volumespreadanalysis.com/tradeseqexp.pdf




Thanks for that share, interesting read! Definitley something I've overlooked in the past.

Cheers


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