Support and resistance levels are the basis of technical analysis. You can play crypto casino without them, but you won’t be able to make your own business based on trading.
A proper reading of the lines shows traders what is happening with the market: what is the trend, where it makes sense to enter, where to put Take Profit and Stop Loss.
Support and resistance levels are the closest price zones, in which it’s hard for the market to slow down and it couldn’t immediately overcome them. But on the breakdown, the most reliable signals are formed.
That’s why experienced traders make support and resistance lines close to the right edge of the chart each time point, regardless of the time frame.
There is no place for predictions: lines couldn’t predict the future — only the fact of breakdown is important.
We talked about this in detail in the two previous blog posts.
In the first part of the trilogy about Properties :), we’ve found out how the direction of the breakdown indicates the possible direction of the market.
In the second part, you’ve learned that the price has a great chance to break away from the level than break through it, also, what illusions threaten traders, hos the market reaches the level and how events are developing in real.
The third property is called “mirror” - and it is more cunning than it may seem.
You should know about it if the support and resistance lines are pierced. It helps to determine the best entry points — prices with the highest potential and the lowest risks. That we will analyze it in this blog post. Moreover, you will learn what the guile of the level’s breakdown is and how all three properties are shown on the chart.
Let’s imagine that the market is fluctuating between the nearest support and resistance levels:
Then it breaks through the resistance level:
And closes above it.
We’ll suppose that you remember about the 1st property: the direction of the breakdown coincides with the further direction of the price. Simply put, in which direction the level is pierced, the market follows this direction. Therefore, in our example, purchase items are relevant.
When to enter the market? What's the catch?
After the breakdown level, the market often starts to move downwards. This is a temporary decline. Sometimes it results in a real correction, but often it is still not the key direction of the trend — it’s just a “respite” before a new spike. At this moment, it is important to take into consideration the last level that was pierced — a level that has just worked as a resistance:
It stopped being the resistance after the breakthrough, but, according to the third property, it continues to play an important role.
You remember that after the breakthrough, a small rollback often occurs. This decline before the new spike stops approximately in the zone of the previous pierced level. Then a new growth starts from there, and the level turns into an “antagonist”:
In our example, the market pierced the resistance level, then returned to it, after which it grew, and the support line turned into resistance. Therefore, the property is called a mirror.
It might look like this:
Working out the third property on the chart
Let's talk about what you see here:
- The market turns from growth to sliding down, forming a resistance level.
- The shadows of three candlesticks consistently test the level, but they beat off from it, following the second property of the levels. Notice that the fourth candlestick is pointed by the green arrow. It closes above the level, but this is not the breakdown. Do you remember why? The candlestick has opened below the line.
- The fifth candlestick opens and closes above the resistance level. It pierces it. The level isn’t relevant anymore, but we still leave it on the chart, and soon you’ll see why we leave it.
- But first, we see that a new resistance level is formed: find new pairs of bullish and bearish candlesticks (a hint is waiting for you if you’re a lazy one). They are immediately followed by a turn: a pair of growing candlesticks forms a new support level. What do we see? It is forming exactly in the area where the resistance level lost its relevance.
What do you see on the following days (according to the daily time frame chart):
The final stage of testing the third property on the chart
The third property is completed: the turn that you’ve seen before now can be considered as the decline that occurs according to the third property. The last resistance line turned into support, and the market continued to move within the framework of the main trend.
And this is how the third property of levels looks like in more rare situations when the trend turns from bullish to bearish. Then the level of support turns
...to the resistance level!
And the support level, by the way, slides down. Hopefully, by this point, you can already define it by yourself. Carefully, further spoiler!
Find two bull and two bear candles as close as possible to the right edge of the chart.
Attention, the correct answer is:
New support level on the chart
We have bad news: the levels change roles only in 30% of all cases. This is quite common, but 30% — unfortunately less than 50%. The implementation of the property gives the best points to enter the market. As you might have already guessed, they lie on the specular line: for example, in the zone of new support, if that one in the recent past acted as resistance.
The decline after the breakdown does not necessarily stop strictly in the zone where the resistance level was previously located. It can slide even lower. Sometimes the market breaks the line from bottom to top, then back — from top to the bottom, but a decline stops and the upward movement continues:
As you can see, it continues from a point below the previous resistance level. This happens very often, so you shouldn’t expect a total precision from the third property. The picture above can be considered as a work out of the 3rd property using the specular.
So, what we’ve understood by this moment:
After the market breaks through the level, the trend may continue, also may stop. Let’s suppose that the trend persists. Then the market will follow one of two key ways. The first: it beats off the level and immediately continues moving forward. The second: it goes through the “counter-trend” a little further, and then returns to the trend and soars.
On the graph, these scenarios look like this:
You see the candlesticks test the level and finally pierce it. Further, the black candlestick fixes recession - here is the fork. Let’s suppose that the trend persists, taking into consideration both paths along which a chart can follow.
The first option is illustrated by the blue arrow: the price bounces off the last pierced level on the first property and continues to grow.
This green arrow shows the path on which the price will move if the downturn is more aggressive. The first white candlestick after the black one tells us that the market is moving downwards and touches the pierced level. This is the first signal that the market will follow the direction of the main trend. According to our example, the direction of the breakdown is upward.
While the market is moving further, new support and resistance levels are forming:
The scenario repeats:
The market breaks again through the resistance level (yep, it happens, although we’ve already forgotten about this). The third property shows the points at which the market can turn:
- a zone of the last broken level, according to our example - the resistance level
- a zone between the last pierced level and support level
It is important to remember about the reliability of the support and resistance lines. We’ve analysed them in the first part of the Property Trilogy. As you remember, we judge the reliability of the line by four characteristics: time scale, duration, number of touches and inclination angle. The longer the timeframe, the stronger the line. However, the longer the line, the less reliable are its signals because there is a great chance that the “trend is tired, and it wants to rest”:
Despite the signals, the trend is over
You should remember about it
This is also important.
- The stronger the trend, the stronger the correction can be:
You can notice on the chart that a strong drop immediately bounced back.
So, what we’ve learned today
- The recession comes after the level’s breakthrough
- The market can return to the pierced level, beat off from it and continue the trend. And it can pierce it again, return to earlier points, and only here return to the original trend. In this case, the support and resistance lines often change their roles.
- The most reliable signals to enter the market lie in the specular zones, on the lines where the support turns to resistance line, or resistance turns into support line.
- The market has a great chance to turn in the zone of the last pierced level, and in the zone between the last pierced level and the current level.
- The longer the timeframe, the stronger the line.
- The smaller the timeframe you work on, the more time you need to spend analysis to determine the entry and exit points. The fact is that on the daily timeframe the shadow of a candlestick, breaking through the level, on 15 minutes can be a real trend.
- A few conclusions: since the mirror property may work, the punched level should not be removed from the chart shortly after the breakthrough.
- Using these tools, traders do not try to predict the chart direction but use them to “interpret” the facts.
- Guessing has nothing common with trading. If you try to guess, then this is not trading, but gambling, sweepstakes or crypto casino. We discuss a business in which you operate strictly within the framework of your prepared plan, transaction volumes calculated in advance and do not guess, but react according to the market movement.
Well, as usual🙂. Find the third property on the real chart, and practice until you start to see it easily🙂
Follow these steps:
3Commas — SmartTrade — check box “TradingView” — Done😎!
May the profit be with you :)