In addition, the graphs show that the history of prices of a financial instrument, accompanied by the volume, they are also a reflection of human behavior. And because they reflect the basic human nature, they can be used as a psychological map, if you learn how to read them.
As technical analysts, we know that stocks, indices and futures are often shaped model, similar to each other. At that time, as no two models do not overlap completely, recognizable features appear often enough that we can identify these patterns and use them to predict price movements. Since these models reflect the faith and emotions of people, an important aspect of knowledge models – the ability to understand basic human behavior, and sell it accordingly.
Many indexes and shares in their daily charts are currently forming or have already formed a reversal pattern, known as the “head and shoulders. Head and shoulders appear on the chart (at any time), when the action (for example) is increasing in an uptrend to a new high. Strong volume raises the price to a peak, which forms the top of the left shoulder.
Then there is a rollback. Rollback – a reflection of mass psychology, when latecomers to podprygnuvshemu uptrend jump into the game. At a time when the rollback is completed, they come, pushing the price of a new high. Soon, however, tired latecomers stop “paying” for overbought stock. There is growing fear, and they realize that is risky to climb on top of collapsing (head). Short sellers start to attack, and frightened bulls are appealing to the mercy of the market. Stock tumbles to the previous area of support formed by the completion of the left shoulder. Now head fully formed.
In this area, known as the line of the neck (complete model), a small group of hopeful buyers again increases the price. This time, however, optimism teplyaschiysya pulls the price only to the top of the left shoulder, and even below. Price is set to form the top of the right shoulder.
Short sellers salivate and sharpening their claws. When the price falls back to touch the line of the neck, head and shoulders model is finished. By this time, some short sellers have entered early (high risk), in anticipation of the impending fall below the neck. Many times the action will gepy down (on the daily chart) after a complete model of the head and shoulders, when the short sellers would drive investors from panicking unfortunate action.
Each pricing model has a fundamental psychological project that reflects the emotions and behavior of the masses. Trade in these emotions – an important tool in the arsenal of every trader.