the hAndbook of technIcAl AnAlysIsAs price pulls back to Point 3, traders that failed to go long at the breakout
level associated with Point 1 may now be regretting that they missed the opportu-
nity to participate in what they believe is a reliable uptrend. Not wanting to miss
out on another opportunity to get in, these traders now go long on the pullback to
Point 3. Another group of traders may have gone long at Point X and liquidated
their positions at the first resistance level. These traders may also be regretting
exiting and re‐enter on the pullback to the support level associated with Point 1.
This behavior is referred to as regret bias. Both regret and prospect bias help ex-
plain why uptrends make higher peaks and troughs and downtrends make lower
peaks and troughs. It also helps explain why resistance turns into support, and
vice versa. The process repeats at Points 4, 5, 6, and so on, in an uptrend.
In Figure 25.3, a trendline was drawn based on Points X and 3. Traders have
a tendency to buy at a trendline support in an uptrend (and at trendline resistance
in a downtrend), as indicated at Point 6. This is a form of heuristic or knowledge‐
based bias. A heuristic represents a simple guideline or rule of thumb. As such,
traders act on these rules of thumb without understanding the reasons behind
them. In fact, many of these heuristics may not even have an underlying explana-
tion. This may render the application of heuristics somewhat unreliable. Traders
act on these simplistic preconceived notions and expect them to work consistently.
This is also referred to as magical thinking. Magical thinking, which stems from
heuristic bias, helps explain why traders tend to buy at barrier support and sell at
barrier resistance.
As the trend persists, many traders are convinced that they would have bought
the dips and sold at the highs in an uptrend. This overestimation in their ability to
forecast or time the market is referred to as hindsight bias. Hindsight bias helps
explain why a trend persists. Traders are more likely to recognize potential buy
and sell signals retrospectively. Patterns and triggers are always clearer and more
obvious after the fact. Traders tend to get even more frustrated and regretful for
not participating in a trend if they can clearly identify it on hindsight. This regret
further fuels the buying of upside breakouts and the subsequent buying at various
rising support levels in an uptrend.
Another explanation of why a trend persists is attributed to traders defending
their decisions for fear of being ridiculed or proven wrong. For example, traders
that bought at Point 2 would buy into even more positions as price retraces and
finds support at Point 3 in order to prove to their colleagues and acquaintances
that they have made the correct decision. In fact, some traders may even continue
to buy at the next few lower support levels in a retracement just to prove their
point. We refer to their behavior or attitude as ego defensive. This behavioral bias
helps explain why there is more buying pressure in an uptrend and selling pressure
in a downtrend.
Many traders also experience discomfort or post‐decision dissonance when
their positions start to experience loss. In order to reduce this state of dissonance,
traders continue to buy into more positions during a retracement in an uptrend,
believing that prices will eventually rebound, lifting their portfolio into profit-
ability. This behavior or attitude is attributed to sunk cost bias. It stems from an
unwillingness to experience or face loss. As a consequence, traders sometimes