Explain the pshychology behind the suport and resistance levels that can be observed in price charts.

Expert Solution

Support and Resistance levels are used to analyse the price trends.
Support level is associated with a downtrend. It is the level which depicts a pause point of a downtrend(decrease) due to demand concentration. Reflects buying interest
Resistance level is associated with an uptrend of prices. It is the level which depicts a pause point of an uptrend (increase) due to supply concentration.Reflects selling interest.
The psychology behind using these levels in price charts is to help the traders identify the points where to buy the securities at low prices and when to sell the securities at high prices.
These levels are used to determine the potential entry and exit points of market.
These levels are used as basis for future forecasting of prices of assets.
It is a common belief that support and resistance levels cant be broken which restricts the traders to affect/push prices as per their will and hence It helps in controlling the behaviour of traders.

Rahul Sunny answered 6 months ago

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