Trading against the trend – recommendations of experienced traders
In most cases, trading with the trend in Forex is considered less risky and more profitable. However, what to do when you want to enter a trade against the trend? If you are a novice trader , we recommend that you refrain from such attempts, since they will not bring you anything but loss of money. Even if you are lucky once, the following trades closed by stop may negatively affect your deposit. But experienced players, especially those who trade within the day, can try counter-trend trading, but with the obligatory observance of our recommendations, since this type of trading is very risky. In this article, we will look at what counter-trend trading is, when it can be used, and also reveal the secrets in which cases counter-trend strategies can bring good profits. For those who have not yet decided on the choice of a brokerage company, we recommend that you look at our rating of Forex brokers .
When can trading against the trend be useful?
Probably all traders have ever heard the phrase “The trend is your friend”, but, as a rule, most of the time the market is in a state of flat, and only 20-30% of the time there is a pronounced trend in the market. What do you do the rest of the time? Of course, if on the chart you can see with the naked eye an upward or downward trend with small pullbacks, which moves as if in a channel, starting from a trend line or a moving average, then you should open deals only along the trend. However, if there are strange zigzag movements in the market, then while you wait for a clear trend to form, you can miss your profit, since such movements can last for more than one month. In this case, you can trade carefully against the main trend. There are several counter-trend strategies:
- Trading on pullbacks. Strong trend movements are very often followed by pullbacks, so they can also be used to make profits. This usually happens after the release of important news , when the price first rushes in the direction of the main trend, and then a correction occurs. This pattern is used by news traders. First, they open their trades in the direction of the main impulse of the economic event, and when the movement is exhausted, they close positions and open new trades in the opposite direction, increasing their profits. Also, a correction is observed at the close of the American trading sessionand during the Asian session. If you are going to trade on pullbacks, you should remember that the correction is always smaller in size than trend movements, so you should set minimum profit-taking targets;
- Scalping strategies. When trading with scalping strategies, it is necessary to consider any price movement in order to make a profit, including trading against the trend. Since the scalper uses small take profits , and the duration of transactions does not exceed 5-10 minutes, he can successfully trade both with the trend and against it;
- Channel trading. Sometimes the price moves in an upward or downward channel , starting from both its upper and lower boundaries. In this case, you can open both sell and buy positions, regardless of the direction of the main trend. The only thing that will be different is the size of take profits, in the direction of the trend it will be greater than on pullbacks;
- Trading using oscillator indicators. You can also trade based on indicators such as the Stochastic Oscillator . When the stochastic lines cross in the overbought zone – sell, and when the stochastic lines cross in the oversold zone – buy;
- Search for turning points on the chart. Another type of counter-trend trading is the search for reversal patterns on the chart, that is, the end of the current trend and the emergence of a new movement. In this case, you may find yourself at the origins of the emergence of a new trend, which promises to receive large profits. However, such setups are extremely rare, and entries against the trend can cause significant losses. To protect your deposit from unreasonable entries into trades that entail triggering stop losses, you must follow the recommendations, which you can learn about by reading our article to the end.
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What to look for when trading against the trend?
If you want your trading against the trend to be successful and profitable, then you need to pay attention to the following nuances:
- You need to enter trades only if there are support or resistance levels. If you see the formation of a reversal pattern, for example, a pin bar, then before entering a trade, you need to see whether it is based on any level or not. The level can be horizontal levels , moving averages, Fibonacci levels , trend lines, etc. If there is no significant level, then we can say with almost 100% certainty that the trend will continue to move;
- Before entering a trade, focus on a higher timeframe. For example, if you are trading on the H4 timeframe and see that a reversal pattern based on the level has formed, you need to make sure that it is significant. To do this, switch to a higher timeframe, in our example it will be D1, and see if you can draw a level there. If not, then such a transaction should be ignored;
- Pay attention to the formation of reversal patterns. You can use chart patterns (head and shoulders, double top, double bottom), price action patterns (pin bar, rails) and any other reversal setups. If this or that reversal pattern is formed, based on a strong level, then we can consider entries into a trade against the trend;
- Wait for the signal confirmation in the form of retesting the level before entering a trade. If the price reversed and went against the trend, and then two or three candles closed, the high or low of which are approximately at the same level, this indicates that you have a sufficiently strong resistance level, and it can be considered as a support.
To enter a trade, it is recommended to use limit pending orders , which must be placed near the level with small stops;
- Small take profit values should be set as benchmarks for taking profit. Since the correction at any minute can be replaced by the continuation of the trend, it is necessary to set take profits to the nearest resistance level;
- To trade against the trend, you must use pending orders. In this case, it is best to use stop pending orders, which should be placed at the extremes of signal candles, as this will help protect you from the occurrence of unprofitable trades;
- If, after the news was released, a long candlestick with an equally long tail closed, this indicates that the strengths of the “bulls” or “bears” are outweighed.For example, there was an uptrend in the market, and then news came out, after which the price first shot up sharply and no less sharply fell, as a result of which the candle with a long tail closed. In this case, you can enter a trade with a market order in the direction opposite to the tail; in our example, you need to open sells. After such a rise, the price will continue to fall for some time. In this case, the stop loss should be placed behind the tail, as price spikes may still appear. Despite the large stop loss, the size of the take profit can be even larger, since after the formation of such a candle, the price often travels a significant distance. This situation, perhaps, is the only justified way to trade against the trend and works almost 100%.
Thus, it is possible to trade against the trend, but only following all the recommendations described above. Trading against the trend is a risky business, so it should be approached wisely with sufficient knowledge and practical skills. If you are just starting your acquaintance with the Forex market, then we do not advise you to open deals against the trend, use trend strategies in your trading , and also trade on candles with long tails, as described above.