However, counter-trend trading is inherently riskier and more difficult than trading with the trend, so it should only be attempted after you have fully mastered trading with the trend. 30/10/ · This is a counter-trend strategy This forex strategy is based on selling when the market is overbought and buying when the market is oversold The indicator we use is 25/8/ · As a counter-trend always moves against the prevailing trend, the majority believes that the odds of it winning that trade are low. Today we are finally helping you to 5 Steps for Trading Counter Trend Moves. Step 1 – The Opposite Candle Rule to Identify the Start of the Counter Trend Move; Step 2 – The Confirmation. Another Candle Opposite to When making a counter trend trade, you are looking to profit from the swings higher or lower against the primary trend. Counter trend trading is so popular because you can do it in any ... read more
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Please disable AdBlock or whitelist EarnForex. Price the reading moves above the 70 level; it indicates the price is overbought. This could also signal that the price is looking to make a reversal back lower.
On the flip side, when the price moves below the 30 level, it indicates the price is oversold. This could be hinting at price making a reversal and moving back higher. Some of the best strategies will combine several things, such as popular indicators and price action analysis.
The easiest way to perfect these strategies is to download some free demo charts and make practice trades.
That way, you can test with different markets and different time frames. I hunt pips each day in the charts with price action technical analysis and indicators. My goal is to get as many pips as possible and help you understand how to use indicators and price action together successfully in your own trading. Skip to content. When carried out correctly, counter trend trading can be a high probability trading strategy. First, put the indicator and open the 1m chart.
It will show you the RSI levels on all timeframes for that currency pair. The RSI reaches 20 or less we enter long. A better signal is when two or more timeframes have the same low RSI signals. A more powerful signal would be a forex divergence on the chart that suggests our position from that entry. The RSI reaches 80 or more we enter short.
A better signal is when two or more timeframes have the same high RSI signal. In the first chart setup, even though it moved down then up to continue a strong up move, you could get at least 10pips; as I said, your target should take timeframe into account. The first signal appeared only in the 1-hr chart. It takes some consolidation to free up the ob reading. In the second setup, Both 4hr and 1hr were above 80, a stronger signal to sell into correction; the chart price corrected 30 pips without spread almost.
True, it goes up again. We only use to get pips during the trend corrective move. Do not be greedy; one or two forex reversal candles can be good for you. Please do not wait for the entire reversal of the trend because it needs more than that. Make the level line red and clear as they are on RSI extremes.
Put a WMA on the chart This is only just for guidance, so we can see how far the chart price went away from the moving average. we have seen in many situations how chart prices try to narrow the distance between this MA and not stay far away, especially when the market is at the extreme.
We will need a good eye to catch clear opportunities.
The vast majority of methods touted on market forums and trading blogs are centered around trend based strategies. There is not as much literature on trading methods that are focused on countertrend approaches. In this lesson, we will define and discuss the basic elements of countertrend trading, and present some best practices and strategies for implementing such strategies in the market.
Countertrend trading is a contrarian trading approach , wherein a trader seeks to profit from price moves that run counter to the prevailing trend. Countertrend traders typically fade the trend in an attempt to catch a short-term price retracement or possibly a trend reversal. Generally, countertrend trading strategies tend to be intermediate-term in length. More specifically, countertrend swing traders seek to hold positions between a few days to a few weeks. Now, there are also a class of short-term traders that trade countertrend strategies and for whom this timeframe does not necessarily apply.
These day traders and scalpers may be in and out with their countertrend techniques within a few hours or by the end of the trading session. Regardless, the underlying premise of countertrend trading can be understood as being the opposite to a trend following methodology.
Whereas a trend trading style focuses on momentum breakouts and riding a trend for as long as possible, a contrarian or countertrend style often calls for locating potential reversal points within the larger price movement. The mindset of a trend trader is very much different than that of contrarian trader.
Based on a more technical definition, trend traders seek to locate and participate in impulsive price moves, while countertrend and mean reversion traders seek to find critical turning points to take advantage of corrective price movements.
Impulsive price moves as described within the Elliott wave theory , is a scenario wherein the price action is moving along in the direction of the larger trend. And conversely, corrective price moves as described within the Elliott wave theory, describes a scenario wherein the price action is moving along in a direction that is counter to the larger trend. As you might imagine, counter trend traders need to be much more adept and nimble to make consistent profits from the market.
That is not to suggest that countertrend trading is not a profitable endeavor, but rather, it should shed a light on the level of difficulty that exists in finding and applying a consistent edge when it calls for fading the market. Countertrend traders should take the proper steps to ensure that they are not trying to catch a falling knife, or fade a euphoric price run. This is an old adage that every trader should keep in mind, particularly those who are in the business of fading trends.
These guidelines will apply equally regardless of whether you trade the foreign exchange market, futures market , or the equities market for that matter. The best course of action during these events is to consider staying on the sidelines and waiting for the market volatility to subside. Always have a hard stop in the market — Some traders prefer to have what are referred to as mental stops in the market rather than hard stops. A mental stop is essentially a stoploss level that a trader has deemed important and one wherein they will likely exit if the trade begins to move against them.
A hard stop on the other hand, refers to an actual stop loss that is placed in the market and will be triggered automatically when that specific level is reached. Countertrend traders should consider always having a hard stop in the market to avoid the complications of having to react to sharp adverse price moves. Do not add to a losing position — Some contrarian oriented traders have a tendency to add to their positions as the prices move against them.
Although, this may work for a small minority of experienced traders who are extremely disciplined , the vast majority will find it to be a losing strategy, and one that can run the risk of leading to excessive losses on a position. But doubling down on those probabilities by adding size as the price moves against you can and often will put you in an uncomfortable position.
Wait for confirmation before entering a counter trend set up — Adding the requirement for some type of confirmation mechanism within a countertrend strategy is advisable. Although waiting for confirmation can sometimes reduce the reward to risk profile on a trade, it will boost the overall win rate when used properly. This is particularly true for mean reverting techniques, where even a minor miscalculation can lead to a losing result.
Set a reasonable take profit level — The majority of countertrend trading opportunities tend to offer limited profit potential from the risk reward perspective. Unlike trend following systems wherein you might expect reward to risk profiles of 3 to 1, 4 to 1, or even higher, mean reverting strategies tend to offer less attractive potential profit to potential risk profiles.
As a result, contrarian swing traders often find it best to set a conservative take profit target level, typically in the range of 1 to 1 or 2 to 1 reward to risk units. One area of risk management that traders need to pay particular attention to is position sizing. Betting too little will often result in subpar percentage returns, while betting too much can result in potentially catastrophic damage to your trading account. It provides an acceptable level of risk for a desirable level of potential return.
Traders that decide to take a contrarian trading investing approach , will often be looking for opportunities to sell into an uptrend, and similarly, they will be seeking to buy at lower levels within the context of a downtrend. Potential for higher win rates — As we touched upon earlier, trend following systems tend to offer better risk to reward profiles, at the cost of lower win rates.
Mean reverting strategies on the other hand tend to offer less desirable risk to reward profiles, but come with the advantage of higher win rates.
As a result of being able to apply a strategy that offers a more attractive win percentage, a countertrend trader can often realize lower max drawdowns. Additionally, when drawdowns do come, countertrend swing traders can often trade out of these losing periods faster than those employing longer-term trend trading strategies.
Lower holding periods on trades — The traditional countertrend trader is considered to be a swing trader who seeks to hold positions for as little as a few days to as long as several weeks. An average of about one week would be an ideal trade duration for most traders who consider themselves contrarian swing traders. Holding positions for a relatively short period of time can provide psychological benefits for those who are impatient or have a tendency to lose focus, or simply lose interest in the trade management process over time.
More opportunities to apply your edge — Due to the lower holding periods that we just mentioned, countertrend traders will often enjoy the benefit of applying their strategy in the market more frequently than other longer-term position traders. Having an edge in the market is critical to producing profitable results. But just as importantly, the ability to apply that edge over a longer series of trades, will help amplify those trading returns. This would be very uncharacteristic of most trend based strategies.
The ability to trade in and out of positions — Contrarian swing traders have the advantage of being able to get in and out of positions quickly. They do not have to project price trends over very long periods of time. Instead they can focus on shorter to intermediate term price swings, allowing them to be flexible and trade either side of the market.
The ability to be nimble and open to whatever the market presents is a characteristic that many successful swing traders share. Now that you have a sense of some of the benefits that a countertrend style offers, we should also mention some of the drawbacks of such an approach. For most traders, especially those that are new to the markets or fairly inexperienced, it is much better to start with learning a trend based method. Once you have refined a strategy that trades in alignment with the larger market trend, then you can then add a countertrend method as a supplement to your overall trading arsenal.
Below we have outlined some of the disadvantages of trading against the trend as a primary trade strategy. And more specifically as it applies to the markets, when a trend is set in motion there is a tendency for it to persist.
And as a result, attempts to fade the trend can and do often result in a series of losing trades. Market trends persist longer than turning points — Those that favor countertrend approaches have to be extremely skilled and enter only at the most favorable time. The reason for this is because turning points in the market can occur rather quickly, providing little time for a trader to react to it. Trends on the other hand are much easier to recognize and will often persist for extended durations making it fairly straightforward to enter into, even at less than ideal entry points.
It can be psychologically difficult to be a contrarian — There is no greater feeling in trading than taking a position against the crowd and the market proving you correct. While that can certainly be a boost to your ego, it can also be a dangerous exercise, and damage both your trading account, and your own psyche when you are incorrect in your assessment. A contrarian is often regarded as the lone wolf. You will rarely realize any major outsized gains — Countertrend tactics are overwhelmingly bread-and-butter types of trades.
That is to say that one should not expect regular intervals of hugely profitable trades. Countertrend traders are akin to baseball players who are seeking to hit singles and doubles, rather than home runs and grand slams.
While there is nothing wrong with consistently eking out average gains, if you are the type of trader that craves the big price moves, then your personality may not mesh with a contrarian trading methodology.
The countertrend trading strategy that will be revealed here incorporates several different types of technical studies.
Once they align to meet our conditions, it will provide for a high probability fade trade set. Within the financial markets, you will often see three distinct price legs or pushes in the direction of the trend, which are interrupted by two smaller corrections.
For those who are familiar with the Dow theory or Elliott wave theory, you will recognize this as the impulse structure. If you are not entirely familiar with the concepts within the Elliott wave principle, you will still be able to benefit and use this particular countertrend method.
So, once the market completes these three pushes in the direction of the trend, prices will often reverse and begin to correct a portion of the prior impulsive move. Knowing this, we will seek to locate price trends that have completed this third push, either to the upside in the context of an uptrend, or to the downside in the context of a downtrend. In addition to this price action pattern, we will incorporate the Relative Strength Index, or RSI indicator into the mix.
Once we have been able to isolate the third push within the impulse structure, we will need to see a regular divergence pattern form between the second and third push and the RSI indicator. This divergence pattern between price and the RSI indicator will further validate a potential reversal in the market.
Only once these conditions have been met will we prepare to take a countertrend position in the market. So here are the rules for entering a long position:. And here are the rules for entering a short position:. The forex counter trend trading example will be shown on the USDCAD pair. The chart below is for the US dollar to Canadian dollar currency pair based on the eight hour timeframe. Starting at the lower left of this chart, we can see that the price started to trade higher, ultimately creating an easily recognizable uptrend.
During this upward price progression we can see three distinct legs or price pushes within the impulse structure. Notice how the first push creates a swing high followed by a minor correction, and then the second push creates another swing high which is again followed by a minor retracement.
Finally, we can see the third push which breaks above the high the second push. Once we have recognized this price action pattern, we would prepare for a potential short countertrend trading opportunity.
But before we do, we need to confirm that a bearish divergence pattern exists. To check this, we would draw the line connecting the swing high of the second push to the swing high of the third push, and then connect a line along the same peaks on the RSI indicator. Notice that third push makes a higher high on the price chart, while the third push makes a lower higher on the RSI indicator. This is a classic bearish divergence pattern, and one that further validates our short trade bias.
Next, we have drawn a line connecting the swing lows within the uptrend, as can be seen by the upward sloping orange line. The sell entry signal would come upon a break and close below this line following the third push. You can see that sell signal noted on the price chart with the blue arrow. Once the sell entry order was initiated, we would turn our attention to the trade management process.
Firstly, the stoploss order should be placed above the high of the candle preceding the breakout candle, as can be seen by the black dashed line above the entry. That level is shown by the green horizontal line below the sell signal.
30/10/ · This is a counter-trend strategy This forex strategy is based on selling when the market is overbought and buying when the market is oversold The indicator we use is 22/10/ · 1) Only trade in the direction of the trend in a higher time frame. For example, if you trade 1 hour charts, trade in the direction of the 4-hour timeframe. You'll be waiting for Counter-trend traders do not intend do trade against the trend, they are trying to enter at or near its reversal. In doing so, they attempt to get a very close stop-loss level (the peak or bottom of 20/10/ · Counter trend is when you would expect price to reach a level in the opposite direction of trend. Could be below the point where the original trend started, or far below. 5 Steps for Trading Counter Trend Moves. Step 1 – The Opposite Candle Rule to Identify the Start of the Counter Trend Move; Step 2 – The Confirmation. Another Candle Opposite to 25/8/ · As a counter-trend always moves against the prevailing trend, the majority believes that the odds of it winning that trade are low. Today we are finally helping you to ... read more
Doing so, helps to add a level of strategy diversification within a portfolio. The price then bounces upwards and starts a new impulsive move higher; however, ten periods later the price action closes a bearish candle, fulfilling the requirements of step 1. If you are entering a trade, at which point will that happen? These guidelines will apply equally regardless of whether you trade the foreign exchange market, futures market , or the equities market for that matter. Next, we have drawn a line connecting the swing lows within the uptrend, as can be seen by the upward sloping orange line.Some of the best strategies will combine several things, such as popular indicators and price action analysis. Listen UP…. All in all, counter trend trading forex you are following a trend completely or moving slightly against it, do not fear to put full risk on that trend as long as your system tells you to go forward. Click Here To Join, counter trend trading forex. Fibonacci retracements can also be useful to confirm when to exit your counter trend trade. Even if you favor counter-trend trades, you can still enjoy trading with the trend when you see a well-defined level for a stop-loss order.