The best traders understand how investor and trader psychology can move stocks. If understood and applied correctly, technical analysis is a study of this psychology.
The chart of Arm Holdings PLC – ADR (NASDAQ:ARM) is no exception. That's why it's our Stock of the Day.
The red line on the chart is called a Bollinger Band. It is two standard deviations above the 20-day moving average. According to statistics and probability theory, 95% of all trading should be within two standard deviations of the mean or average.
This is an important concept for traders to understand because many trading algorithms and strategies are based on statistics and probability theory.
If this threshold exceeds to the upside, a stock would be considered Overbought. This could draw sellers into the market and they may put downward pressure on the price. As you can see, this just happened with ARM.
Read Also: Arm Holdings Is A ‘Strong AI Play’ But Not A Buy, Analyst Says
If the reversal continues and the stock moves lower there is a good chance that it will find support around $163. This level was resistance and in the financial markets, it's common for a price level that had been resistance to convert into a support level.
This happens because of trading psychology. It is due to seller's remorse.
Some traders and investors who sold Arm Holdings while it was at the resistance thought they made the right decision when the price trended lower after. But then the sell-off ended and Arm Holdings moved above the resistance level.
When this happened, a number of traders and investors who sold at the resistance thought they made a mistake. Many decided to buy their shares back if they could purchase them for the same price they were sold.
This means if the stock falls back to $163, these remorseful sellers will be placing buy orders. If there is a large amount of these orders it could create support at the level that was resistance.
Successful traders understand how important it is to consider market psychology. It gives them insight into determining at which price levels a stock may reverse.
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