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Use the “Mirror Effect” or To Improve Your Trading

Stories often impart a lesson much better than simply being told to do (or not do) something. Traders are frequently told to follow the trend, but many stubbornly oppose, always trying to pick the point when the trend will end. Trading reversals is fine, if done well. But no matter what, there are times when it is good to be on the side of the trend, simply because there are no reversal signals in sight. Maybe a story will help bring some perspective to trading with the trend.

In war and conflict, as in the markets, the moves of our counter-parties are often unpredictable. This unpredictability can be our downfall, or it can be the element by which we lead ourselves to victory.

Mirror Effect in Mythology

the mirror effect in trading - medusa and perseusIn Greek mythology, Medusa was a hideous thing with serpents for hair, heinous teeth and a long protruding tongue. She was so ghastly that anyone who looked upon her was turned to stone. To conquer such an enemy – one which is more powerful and seems to have the decided advantage – Perseus, the hero who slay Medusa, knew that he must disguise his own movements. But how?

When our enemy’s movements are unknown, or the foe appears more powerful than us, the simplest approach is to mirror their movements. Perseus polished his shield creating a mirror and tucked himself behind it. By doing so all Medusa saw was herself, resulting in her destruction as Perseus crept close and lopped off her head.

Mirror Effect or Mirror Trading

Markets can be unpredictable and contain many foes that are often far more powerful than we are. By mirroring their movements you turn a foe into an ally, or at minimum the foe is neutralized. Do not set out to do a battle with a much more powerful force (the market), hoping that you will and beliefs will change its course. Rather, mirror its movements collecting profits along the way, and only when you see weakness do you strike with might (those rare very high reward situations where it pays to be more aggressive).

The truth is rarely revealed through words, but rather through what is actually done. Trends may exist for no apparent reason, and for much longer than one would reasonably expect. Mirror the actions of the buyers (or whatever the strongest group is)– you do not need to know their reasons, profit from what they actually do. The tides will turn and buyers will flee or convert to sellers…you will be ready to pounce on the fickle crowd. Mirror these movements of the emerging force by crushing the remaining buyers as they retreat – always mirror the more powerful group, now the sellers.

The mirror effect is a powerful strategy that can defeat almost any opponent. Think this all sounds a little dramatic? This is what trading is. You can’t win without another trader losing or giving up their profits to you…not everyone can win.

Cautionary Note on the Mirror Effect

Be aware that using the mirror effect can lead you into a trap, but only if you fail to react to new information. For example, when trading a chart pattern it may breakout to the upside, causing you to act in alignment with the seemingly strongest group–the buyers. What appears so may not always be. If the price quickly retreats–a false breakout–don’t keep your loyalties to the buy side, for it has no loyalty to you. Realize the tide may have shifted, and respond accordingly with your strategies. Mirror the new stronger group. This is an endless sea-saw; the trader who can quickly see who to mirror is the one who will reap the most reward.

Trend trading is about knowing when to be in the trend and knowing which group to mirror. The good thing about financial markets is that there is always a trend somewhere. A trader can slip in and mirror of the movements of the strong trending group. When their actions start to show weakness, the trader can slip away. And that last sentence is an important one. Traders have a huge advantage in that they don’t have to trade if they don’t see a strong group to align themselves with. If there is no one to mirror (no good opportunities), then don’t trade! If the dominant group isn’t obvious (using your analysis methods), you will likely get trampled by the crowd which sea-saws back and forth and can’t make up its mind.

Not mirroring, and always fighting (the trend or the market) is a sure way to deplete financial resources, and likely get killed in the real world.

Final Word

Okay, so maybe you are thinking Medusa and Perseus don’t really have much to do with trading, and this is all just BS. Maybe, but thinking about trading in a non-trading way can often bring realization to where there wasn’t any. If a trader continually strikes at the market, thinking they can inflict their will on the much more powerful force, they are like Perseus if he had opted to attack Medusa in a normal way (which would have resulted in his death).

There is nothing in this article that tells you how to align with the strongest group, it only speaks to the fact that you should. Loads of other articles on the site are geared toward finding trends, and strategies for when/how to get in and out of those trades.

By Cory Mitchell, CMT

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Use ‘Economic War Strategy’ in a Bear Market – What history (King Pyrrhus) teaches us about conserving resources during times of uncertainty so we aren’t depleted when opportunities arise.

Timing in Trading – It can be everything – During the time of Napoleon, Joseph Fouche teaches us important historical lessons about how to move back and forth between one side (of the market) and the other.

In Trading Plan to the End – The story of the Prussian premier Otto von Bismarck, and how we executed his plan perfectly from the beginning and stopped when he reached his goal–a skill few people have. Often they keep pushing, without a new and updated plan, to their own demise.