Way of the turtle

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FALLING OFF
THE EDGE
Edges are found in the places that are the battlegrounds 
between buyers and sellers. Your task as a trader is to find 
those places and wait to see who wins and who loses.
T
rading edges exist because of divergences in market percep-
tions and realities that result from cognitive biases. They exist
because economists are wrong in their belief that market players
are rational. Market players are not rational. Chapter 2 discussed
how cognitive biases provide trading opportunities in a theoretical
sense. This chapter will discuss that notion in further detail by
using actual price data.
Support and Resistance
The concept of support and resistance is fundamental to almost all
types of trading. Support and resistance is simply the tendency for
prices not to exceed previous price levels. One can understand this
concept most easily by examining its presence on a price chart (see
Figure 6-1). 
Copyright © 2007 by Curtis M. Faith. Click here for terms of use. 

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Support and resistance results from market behavior, which in
turn is caused by three cognitive biases: anchoring, recency bias,
and the disposition effect. 
Anchoring is the tendency to base price perceptions on readily
available information. A recent new high or low becomes a new
anchor against which each subsequent price is measured and com-
pared. New prices are considered to be higher or lower in com-
parison to those anchor prices. The reason recent highs and lows
are easy anchors is that they are simple to see on the charts and
therefore are psychologically significant to market participants.
In Figure 6-1, under the label “Support 1,” a low price of about
$1.13 becomes a new anchor shortly after that price is made and
certainly after the price climbs to $1.20 over the next several days.
It is the low point on the chart that will stand out for short-term day