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Trade against the trend - counter-trend trading
The trend is our friend, isn't he dwell in different books on trading? In the dialogues of currency speculators are not uncommon to hear something like that, and yet, for example: "profits should be allowed to grow and cut back losses. Just remember Captain Obvious, very much in his style.
Always trend is our friend, why the inputs at the current market trends are sometimes called jump on the train, and as well as General trade contratrend - these questions try to answer in this article.
Let's start with the cons of trend trading. For traders cons of working in the direction of the market trends seem to be significant enough, came up with the trading against the trend. List the weaknesses of trading with the trend:
• lose part of the movement;
• at risk of entering the market just before the trend change;
• it is difficult to find a good entry point.
And not like a lot of cons, but some of them really confuse traders. For example, that up to the moment understanding of where the market is moving and his movement may have faded out:
Counter-trend trading is to identify points of reversal of the current market trends. It is hoped the speculator that he will be able to open a position almost at the beginning of a new trend or to make a profit on a market correction.
The danger of this trade, as they say, "on the surface". You can take for the reversal of the market only a short-term correction. In this case, the trader has all chances to get loss in their transaction. Sometimes that would open in the direction of a new trend, it is necessary to close several negative positions.
To trade against the trend most effectively, you need to use short Stop Loss and to monitor the correction rates.
Be against the trend
You should separate counter-trend trading, at least two varieties:
• position-taking at the beginning of a new trend to "catch" strong market movements;
• short-term transactions the corrections against global market trends.
To begin, consider the option of working with large order (Take Profit). In this case, you will need to make sure that this is a full reversal, not just correction. To confirm you can use various methods, for example:
• a breakout of extremum against market trend (in the illustration below).
• the formation of the reversal pattern, for example, the pin bar;
• the use of divergent indicators, such as XCODE;
• use the middle line (break the middle).
The figure shows that the next local maximum was less than the previous one. It is a signal that the market trend is likely to change in the near future. The market breaks above the last local minimum that can already be considered as a signal about the change in the market situation.
On H1 and higher timeframes, typically this situation indicates serious changes in the market. This is an opportunity to make a deal almost in the beginning of the growing movement.
Short-term agreement to trade against the trend it is not common. Much more profitable to work in the direction of the trend, opening positions on the adjustments as detailed here. If the work that is countertrend, it is advisable to see a strong momentum price movement intermittently on Forex.
The market is moving sharply in the direction of the trend, but with a clearly increased rate, as illustrated below. In this case, you can put pending order, for example, a Sell Stop when price increase. This position followed by a sharp increase in the market distance, e.g., 10-15 points. When a reversal takes place our stop order, as he moved down the price on a "trawl" (trailing stop).
The market is gradually growing, which is evident by the increasing local minima and maxima. At some point, the price began to rise sharply, forming the impulse. The trader began to follow the market price with Sell Stop order at a distance of, for example, 10 points. As soon as the pulse movement had faded and the price reversed down, the order stopped. When the market reaches the Sell Stop opened position for sale.
This method of trading against the momentum of the market is described here.
Now let's see how to place Stop Loss when trading against the market trend. The local maximum 2 is lower than the extremum of 1. The market breaks above the level of the last local minimum (3) - we conclude a deal to sell and a Stop Loss set a few pips above the last local maximum (2).
Trying to catch the moment of the market turn, we risk open against the global trend, which is only slightly adjusted at the moment. However, it is very convenient that there is no need to set Stop Loss far from the opening point of the position. In the above illustration you can see that the stop loss agreement is beyond the last extremum, because if he will be broken, it will mean a return to the global trend (reversal did not happen).
|Category: Forex | Added by: (05.11.2017)