DislikedI've had one or two PM's asking about how to use psych-lines.
Basically, psych-lines are used in the same way as any other forms of support or resistance, like pivots, MA's and trendlines.
When price approaches one of these S/R lines, it will do one of a number of things.
1)...Ignored
I would just go a little further and generalize the price action even more. I would say that psych levels (along with SR levels and pivot points) always represent an accumulation of buys/sells, and therefore a rebalancing of market sentiment. It is how the market reacts to these new orders that tells us how strong they are and what price action to expect.
Having said that, in my trading I tend to look at the confluence of these levels in a certain price zone with two expectations:
1) The price will bounce off, and I will trade the reversal.
2) The price will push through, and I will trade the continuation.
In both cases I place my stops in the areas that prove me wrong.
1) If the price bounces in the price zone and starts retracing enough to signal a reversal trade, then my stop will be placed at the farthest end of the price zone.
If this stop is hit it indicates that there was in fact no bounce at this price zone, but a push through with a little indecision.
2) If the price pushes through a price zone, enough to signal a continuation trade, then my stop will again be placed at the farthest end of the price zone.
If this stop is hit it indicates it was in fact a bounce off a level that was not predicted in the price zone.
Eyevoltage, what is your take on this approach?