4. Strategy based on a rebound from the level
The main feature is that we open a position after the price changes direction next to it. The signal for the opening of the trade will be the inability of the candlestick that reached the level to close behind it. A candlestick can touch the level with its shadow or its body. Clearance of the power level by the shadow of the candle and the closing of the candle before it will also signal the inability of the price to overcome it. The confirmation of the signal will be the next candle going in the opposite direction from the level.
Trader’s actions when the signal is formed:
- 1) The candle could not close behind the level, having touched it with the shadow or with the body of the candle.
- 2) Wait for confirmation of the rebound from the level by the second candle.
- 3) Buy an option in the direction of the rebound.
Buying a put option at the rebound of the price from the resistance level
Buying a call option at the rebound of the price from the support level
Buying a call option at the rebound of the price from the trend line of an uptrend
Selling at the rebound from the channel line of an uptrend
Reversal Trading Strategy
Deeper Insight
This strategy is similar to the engulfing candle strategy. What I’ve noticed with all strategies is that the zones you choose as your relevant marks can be subjective. In other words, it depends on your skill in seeing where volume is moving from on the chart.
Some traders use zones that were once resistance and later became support, or vice versa, to decide where to place their power levels. These power levels are the areas of interest or concern where price may react.
Notice how the yellow arrow zones have major volume coming from them. Some of those zones also show areas where support was once resistance, or resistance was once support. The white arrow is what I mean by subjective. Some traders may consider that a good zone for different reasons, depending on how they read the chart.
Now look at how price moves from these zones. Can you see why expiration time matters? You may think a shorter expiry would be better for your trades, but my trading buddies and I have found that giving the trade more time usually helps our entries more than it hurts them.
The shorter your trade expiry is, the more confirmation you should wait for. With shorter expirations, you may end up entering in the middle of candles instead of waiting for the candle to close. That can work sometimes, but it also gives price less time to confirm the direction you are expecting.
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