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Trend vs. Counter-Trend Trading

April 13, 2015 by

I have recently noticed that many of my trades turn out to be against the direction of the current trend. Indeed, it seems that several of the popular chart patterns (channels, double/triple tops and bottoms, and even flag patterns) are based on a trend reversal, which is counter-trend by definition. Of course, not all chart patterns are counter-trend — triangles, head-and-shoulders, and pennants provide confirmations to the current trend rather than seeking its reversal. Nevertheless, two valid questions arise — is it worth trying to catch the reversal? Is jumping on the trend train a good idea?

Trend trading offers its own advantages. Without looking deeper, trading with the trend seems like the only sane approach. After all, who would be buying a currency pair knowing that it is going down, or selling when it is going up? Seeing an asset rising in value gives a clear buy signal for a trend trader. The probability of failure is low as the currency pair is riding on a momentum. At the same time, going with the trend usually lacks any clear stop-loss or take-profit opportunities. It is difficult to make sure that you are entering a trade with a decent risk-to-reward ratio.

Trend Trading

Counter-trend trading appears counter-intuitive at a first glance, but it has its own benefits. Counter-trend traders do not intend do trade against the trend, they are trying to enter at or near the reversal. In doing so, they attempt to get a very close stop-loss level (the peak or bottom of the reversal) with a profit target plainly defined by the relevant high and low levels of the previous trend. In most cases, counter-trenders exchange the probability of success (at least partial) for the clarity of exit levels combined with favorable risk-to-reward ratio.

Counter-Trend Trading

Obviously, there is little reason (except psychological ones) to attach oneself to only one of these approaches. Although, I favor counter-trend trades, I still enjoy trading with the trend when I see a well-defined level for a stop-loss order. And how about you?

How do you react to trends?

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If you have any additional details or insights on how you react to trends in Forex trading, please feel free to reply using the form below.

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