Counter Trend Strategy Forex

• The counter-trend strategy targets corrections in the price movement of the traded financial asset to make money.
• The strategy involves buying / selling financial assets that have gone through an impulsive downward / upward move, in the hope that the corrective move up / down will let the trader sell / buy them again at that higher / lower price.
• The counter-trend strategy uses momentum indicators, reversal patterns, and trading ranges to identify the best zones to execute trades.

What the counter-trend strategy means:

The counter-trend strategy targets corrections in the price movement of traded financial assets to make money. Contrarian traders often use counter-trend trading strategies. The strategy involves buying / selling financial assets that have gone through an impulsive downward / upward move, in the hope that the corrective move up / down will let the trader sell / buy them again at that higher / lower price. In both cases the buy-low or sell-high pattern is met, and the trader’s account is the one that benefits.

Traders who use this strategy aim for small gains and are ready to stop and exit a trade if the expected correction does not appear. The counter-trend strategy also sets aside the common investing idea that the trend is your friend, at least at the moment of the actual trade.

The counter-trend strategy uses momentum indicators, reversal patterns, and trading ranges to identify the best zones to execute trades. Traders who use this strategy should always keep in mind that an asset can resume its trend at any moment, so they need to use risk-management techniques, such as stop-loss orders, to limit heavy losses.

Building a counter-trend strategy:

Traders can use momentum indicators, such as the Relative Strength Index (RSI), together with support and resistance zones to identify high-probability turning points. For example, a counter-trend trader might buy a security if it finds support at a 52-week low and the RSI gives an oversold reading below 30. Conversely, the trader can open a short position if the security’s price reaches the resistance zone and the RSI moves above 70.

For added confirmation, the trader might wait for a bullish or bearish Japanese candlestick pattern before entering the trade. The counter-trend range should be wide enough to give a profit target of at least twice the width of the stop-loss. For example, if the trader uses a $5 stop-loss, the profit target should be at least $10.

Benefits of using the counter-trend strategy:

More trading opportunities: When the price of a financial asset swings within a trading range, it offers many chances to buy at support and sell short at resistance. An investor may have to sit in front of the trading platform for a long time if they only trade corrections in a strongly up- or down-trending market.

Exiting with small targets: The counter-trend strategy usually has a smaller target than other trend strategies, and traders take smaller, more regular profits. Although the counter-trend strategy may produce more small gains overall, the trader may be stopped out of positions several times before landing one large trade.

Limits of using the counter-trend strategy:

Opportunities: Using the counter-trend strategy leads to more trading opportunities and therefore more commission fees. Traders who use the counter-trend strategy and expect to make a large number of transactions each month should consider using a per-share commission structure. This means the broker charges a fixed fee per share instead of a fee per trade. Traders then pay commission only for the number of shares they trade, which lets them scale into and out of positions more economically.

Time: Counter-trend moves do not last as long as strong moves in the main trend, so traders need to watch the markets frequently to find the best entry and exit points for their trades. Traders can build their own template and expert advisor for the counter-trend strategy to work around this limitation.

In short, the counter-trend strategy relies on a price correction against the main trend. This move is generally smaller by nature than the main trends, but it may take longer to complete the counter-trend move.

[AFF-CTA: pending]