This series will be a collection of my personal notes from "Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications" by John J. Murphy - considered to be a seminal book on TA. I'll try to simplify things and keep them short.
Overview: Part 1 focuses on the psychology of support and resistance - prepare to do some thought experiments and pay special attention to what you would think in each situation.
Let's get started!
Divide people into three categories: long, short and undecided. Long and short are essentially jargon for owning the currency vs short selling the currency. For example, if I own LTC then I've taken a long position in Litecoin.
Situation: MONA/BTC Chart from early 2017
First of all, notice the overall upward trend on either side of the spike.
Step 1
For the upwards movement from 1 to 2, consider the mindset of people who are long, short or undecided:
-Long - in a 'winning' position, perhaps they regret not buying more
-Short - in a 'losing' position, they think that they might be wrong about their forecasts
-Undecided - feel like they're missing out.
Let's say that at this point, they think that the price will overall increase in a continuation of the upward trend
Step 2
When the price drops from 2 to 3:
-Long - can add to their position
-Short - can buy out of their short position
-Undecided - might be looking for an opportunity to enter a long position
As opposing a strong trendline is a dangerous game, Murphy puts forward this reasoning as a possible basis for the reliability of support and resistance lines.
What do you think of this reasoning?
Further parts will be posted & let me know your thoughts.