Investor Psychology
A third group of participants starts to appear. These chart pattern traders are
more interested in trading breakouts from the consolidations. These participants
place buystop entry orders above the resistance zone and sellstop entry orders be-
low the support zone. In both cases, the stoplosses are usually positioned within
the consolidation. As per most technical trading approaches, the trading of break-
outs is the result of knowledge‐based attitudes.
It should be noted that limit orders are trend inhibiting in nature, and as such,
prices tend to remain within the barrier zones. But as the consolidation develops,
the accumulation of stoploss orders above and below the two barrier zones cre-
ates an increasingly trend‐promoting scenario. This is because stoplosses are es-
sentially stop orders, which are trend promoting in nature.
It should also be noted that the longer it takes for a consolidation to unfold, the
larger will be the number of potential buy stop orders that lie above the resistance
zone and sell stop orders that populate just below the support zone. This explains
why larger consolidations tend to produce stronger and more persistent breakouts.25.5 Behavioral Aspects of Market Reversals
No other price or market action elicits more emotion than the creation of a mar-
ket top or bottom. This is evinced by the extreme volume action that normally
accompanies such formations.Market tops
During the intermediate stages of an uptrend, confirmatory bias and representa-
tiveness bias will play a larger role in fueling the trend. Based on hindsight bias,FIgUre 25.4 Behavioral Elements Associated with Ranging Action.