Trading strategy for mirror levels

Thus, investors will pay more attention to the paper price when it falls towards the super-important support of the trend line, because this is a historically proven value, caused by fundamental factors, which reduce the probability of further decrease of the asset value to the minimum.

An important factor of the growing trend in the market of many stocks is caused by the fact that the USD value reduces in time. Earlier, the grass was greener and 100 green presidents had a higher purchasing capacity.

However, not all markets grow. Traders will observe a series of descending peaks if an asset has a tendency to reduce. Perhaps, they would want to connect these peaks together to build a trend line and find profitable opportunities for entering into a short.

Example. Let’s consider a situation in the gold futures market.

Note that this a tick (1,500) chart and the period is not connected with time. Application of the nonstandard types of charts allows market assessment at a different angle and the resistance and support lines could become more obvious.

In this case, the resistance line is built as a beam, which starts in point 1 and passes through point 2. When the price approached this beam it reversed downward twice (points 3 and 4). That is why when the price approaches the resistance level in the descending market, traders are inclined to expect that the asset will face selling pressure and may consider the possibility of entering into a short position, because this is the line which previously pushed the price down.

Don’t miss our article about the points of entry into a market, where we discussed methods of entry from the support and resistance near the trend channel lines.

The concept of mirror levels is practically constantly mentioned in the literature for beginner traders. It is well-known and is not put in question.

However, the issue of the cause of this phenomenon is not explained (if you have versions, share them in the comments, please).

Indeed, why does the resistance level work as support when it is broken? And why does the support work as resistance when it is broken?

Let’s reason for a while without pretending we know the truth. It is very important here to select the starting point for a logical chain. Let’s use the words of Bernard Baruch as the basic principle:

The main purpose of the stock market is to make fools of as many men as possible.

Consequently, if the market bounces up from the former resistance (a test of a bullish breakout), it means that someone was made a fool. Thereby, the market achieves its main purpose. If we understand who and how was made a fool, it will explain to us the nature of emergence of mirror levels (breakout tests).

Let’s consider an oil futures price chart; the data is from the Moscow Exchange; 15-minute period.

We marked the following in the chart:

1. Short-term balance (auction) with formation of a curve in the form of a bell on the profile indicator. The upper boundaries of the profile is the resistance level.
2. A trap (false breakout) in the descending direction before a true breakout in the ascending direction.
3. Breakout. Note that the clusters are green and the delta is positive. This is an effort of buyers at the resistance breakout.
4. The price approached the breakout level of 56.70 the next day and bounced, jumping upward. Breakout test.
5. Local shakeout.

Why did the resistance level, which formed the balance (1) and was broken (2), push the price upward? To answer this question, let’s try to understand – who was made a fool?

Supposedly, these were buyers who were long in point (3). We can see them in the footprint by green clusters. After the price continued its upward movement, these buyers moved their stops either into the breakeven or to a level of small profit. It means that they were kicked out by their stop losses in point (4). They received a minimal profit (or didn’t receive it at all) although they correctly selected the market movement direction. In other words, they were made fools.

The uptrend continued but not all bulls managed to enter into a position and/or hold it.

Now look at the previous NQ futures chart. Reason for a while what traders were made fools:

• at the area with the first red oval (test of a bullish breakout);
• at the area with the second green oval (test of a bearish breakout).

We already mentioned a number of methods of looking for support and resistance. Let’s speak about the practical side of the issue. How to use the support and resistance levels in trading for making profit?

In general, the scheme is the following:

1. Looking for the support and resistance level.
2. Waiting for the moment when the price approaches the discovered level.
3. Receiving confirmation signals.
4. Entering into a position.
5. Accompanying the position (protective ATAS strategies).
6. Closing the trade.

Every trader decides for himself what methods to select for looking for the levels and what signals to use. There is a multitude of variants. However, we will consider only one of them.

Let’s select the following realization of the above scheme as an example of entering into a position using the strategy of trading by levels:

1. Looking for a mirror level.
2. Waiting.
3. Receiving a confirmation signal from the Cumulative Delta indicator.
4. Entering into a position.