According to Merriam-Webster’s dictionary, a trend is a “prevailing tendency or inclination.” As it pertains to active trading, a trend is a directional move in evolving price action. Generally speaking, there are two ways in which a market may trend: bullish (up) or bearish (down).
For many, trend trading is a preferred strategy because of the potentially extraordinary profits and positive risk versus reward ratios. However, for those brave enough to take on the challenge, counter-trend trading can also be a viable approach to the markets. It can be a difficult strategy to pursue successfully; experienced traders sometimes compare it to “catching falling knives.” In this blog article, we’ll take a look at three tips vital to consistently making money while “bucking the trend.”
When it comes to counter-trend trading, having rock-solid market entry points is a key element of being profitable over the long haul. It simply isn’t good enough to buy or sell a general area against a bullish or bearish trend; if you do so, losses can become exorbitant because identifying concrete market exit points becomes difficult.
Here are a few ways to improve the specificity of your market entry points:
By using technical analysis, viewing trends on multiple time frames, and waiting for signs of exhaustion, you can routinely nail down specific and viable market entry points.
Going against strong trends is an inherently risky business. Selling in the face of strong bullish price action or buying into a plunging market are two practices that can be hazardous to anyone’s trading account. Nonetheless, many traders are firm believers in counter-trend trading methodologies.
If you’re going to consistently profit from going against prevailing price action, then keeping losses as small as possible is key. This may be done in several ways:
It’s important to remember that trends very rarely move in straight lines or change directions instantly. Accordingly, realizing profits from temporary retracements is very possible. However, keeping losses small is critical―remember, one losing trade doesn’t have to be the end of the world!
Although counter-trend trading may seem similar to reversal trading, they are two very different disciplines. The primary contrast is this: Counter-trend trades are temporary, whereas reversals are more permanent in nature. In practice, counter-trend traders attempt to catch a modest shift in price behavior, and reversal traders are focused on picking a market’s periodic top or bottom.
Counter-trend traders should consider multiple factors when setting a profit target. Two of the most important are:
Attempting to go against the trend in thin, slow markets is a difficult proposition. Slippage, choppy price action, and lack of follow-through are very likely to undermine profitability. To remedy issues such as these, it helps to set profit targets that are only a fraction of a periodic trading range. If you do so, you don’t have to be 100 percent correct to make money―significant profits can come from catching a short-term, fortunate retracement in pricing.