Investor Psychology
to cover by buying to close their positions. The specialists will take the other side of
the order by selling into the short‐covering activity. As prices fall back below the re-
sistance level, the specialists will then buy into the new shorts by selling to open new
positions. Hence, the specialists continually bought low and sold high throughout the
process. The trader, on the other hand, continually bought high and sold low. In short,
it is a highly profitable venture for the specialist. Many advanced traders therefore re-
sort to entering the market only after a failed breakout has occurred in order to avoid
or reduce the instances of being put in a disadvantageous position. Victor Sperandeo’s
2B approach is one example of entering on a failed breakout.25.3 Behavioral Elements Associated with Market Trends
There are numerous behavioral explanations for various trend‐related price phe-
nomena. We shall now look briefly at a few scenarios and their possible behav-
ioral explanations.breakouts, pullbacks, and retests
Refer to Figure 25.3. Price breaches a resistance level at Point 1. Based on the as-
sumption that price will persist in an upward direction after a breakout, traders
go long at Point 1. This behavior is an example of a learned response or attitude.
We find that in many situations, price does not in fact persist as expected but
rather pulls back to the original breakout level, indicated at Point 1. This can be
attributed to a behavioral bias where traders have a tendency to be less willing
to risk or gamble with profit than with losses, in what is described by Kahneman
and Tversky as prospect theory. This unwillingness to gamble with profit helps
explain why prices frequently retrace back to the breakout level. This behavior
is also sometimes referred to as certainty bias, where traders prefer the certainty
of locking in a smaller profit rather than the uncertainty of securing a larger one.FIgUre 25.3 Behavioral Elements Associated with an Uptrend.