What are psychological support and resistance levels?
Psychological support and resistance levels are price levels formed based on the feelings and emotions of market participants toward round numbers such as 2100, 2200, 2500, or 2150, 2230, 2320, etc. Investors and traders use these psychological support and resistance levels to determine entry points for buying or selling.
Before getting to know psychological support and resistance, we first need to understand regular support and resistance. These are price levels where market participants generally agree that the price will not break through. There is a high chance of reversal when the price reaches these support or resistance levels. Traders look for entry points to take profit when the price chart shows signs of reversal at these levels.
Support forms during a downtrend when selling pressure exceeds buying pressure, causing the asset’s price to fall to a certain low point. When demand to buy emerges at this lower price, the price rebounds upward. In the future, if the price returns to this low point and then rises again, that low price level becomes the support level, where the price is unlikely to fall below.
Psychological support is similar to regular support that forms during a downtrend when buying pressure causes the price to rebound from a low point. Traders and market participants generally agree that these previous low prices, or levels close to actual support points represented by round numbers, act as the strongest support levels. This leads to a large number of buy orders being placed at these psychological support levels.
Resistance forms during an uptrend when buying pressure exceeds selling pressure, causing the asset’s price to rise to a certain level. When selling interest increases at that higher price, the price reverses and moves downward. In the future, if the price reaches that high level again and reverses downward once more, that price point becomes a resistance level where the price cannot continue to rise.
Psychological resistance is similar to regular resistance, as it forms during an uptrend when selling pressure causes the high price to become a resistance level. Traders and market participants generally agree that the previous high prices or those near the actual resistance levels, especially at round numbers, are the strongest resistance points. This leads to a large number of sell orders being placed at these levels.
Understanding psychological support and resistance levels helps traders align their market view with the majority of participants, enabling more accurate trade entries.
