Besides, what charts show the history of the price of a financial instrument, accompanied by the volume, they are also a reflection of human behavior.. And so, that they reflect the basic human character, they can be used, as a psychological map, if you learn to read them correctly.
Like technical analysts, we know, that shares, indices and futures often form patterns, similar to each other. While, as no two models absolutely duplicate each other, recognizable features appear often enough, so that we can identify these patterns and use them to predict price movement. Since these models reflect the faith and emotions of people, important aspect of model knowledge – the ability to understand basic human behavior and trade accordingly.
Many indices and stocks on their daily charts are currently forming or have already formed a reversal pattern, known as “head and shoulders”. The head and shoulders appear on the chart (at any time scale), when stock (for example) rising in an uptrend to a new high. Strong volume pushes the price to a peak, which forms the top of the left shoulder.
Then there is a rollback. Rollback – reflection of mass psychology; when latecomers to a bouncing uptrend jump into play. In the moment, when the rollback completes, they enter, pushing the price to a new high. Soon, Nevertheless, tired latecomers stop “pay off” per overbought share. Fear builds up and, they realize, that perilously perched on a crumbling summit (head). Short sellers start attacking, and the frightened bulls cry out for the mercy of the market. Stock tumbles to prior support area, formed by the completion of the left shoulder. Now the head is fully formed.
In this region, famous, like a neck line (finished model), a small group of hopeful buyers increases the price again. This time, but, lukewarm optimism pushes the price only to the top of the left shoulder, and even lower. Price reverses, forming the apex of the right shoulder.
Short sellers salivate and sharpen their claws. When the price falls back, to touch the neck line, head with shoulders finished. By this time, some short sellers had already entered early. (high risk), pending an impending fall below the neckline. Many times a stock will gap down (on the daily chart) after that, how the head and shoulders model is finished, when short sellers drive panicking investors out of a hapless stock.
Each price model has its own basic psychological project, which reflects the emotions and behavior of the masses. Trading these emotions – an essential tool in every trader's arsenal.
