Trend trading has certain inherent advantages that stack things in your favor from a statistical standpoint, but psychologically it is easier to counter-trend trade as this style of trading has the idea of "getting a deal" behind it, whereas trend trading may often involve buying at new highs or selling new lows; something that can be uncomfortable to do. As a result, traders are lured into counter-trend trading and are often not aware of how this impacts their overall statistical profile. This can lead to a difficult psychological situation for the trader. Either way, if you are aware where you stand as you trade and the likely impact of the bigger picture, the result you get is more likely to be in line with your expectations and success should be easier for you.
Why does trend trading have a statistical advantage over counter-trend trading? Because markets tend to have non-normal distributions of price movement. In other words, the market will often move further than most people expect in any given direction. So, if you trend trade, you can get caught in some really big trades. This can almost never happen in counter-trend trading because that trend resumes and you have to exit the position. This all adds up to an inherent advantage for trend-related traders.
Now, since most of us like to get a deal (or at least feel we are getting a deal), it is in fact possible to blend these two strategies into one. This can be done by trying to hop on a trend while the market is moving in the opposite direction. So, you are trend trading with the strategy of entering in the counter-trend moves. This can have the effect of potentially lowering risk and increasing reward potential.
On the chart below we can see an example of this market by the green arrows. Here we are going with the trend but we "buy the dips."
Can we stack things even more in our favor here? Yes, One of the biggest keys to successful trading is the way we manage the trade. If we scale out portions of our position as the market goes our way, we can stack things in our favor to some extent. This strategy works because as the market goes higher, as in the case above, booking profits reduces risk for the remaining position and makes it easier to "let the winners run."
These two strategies, money management and using a composite trend/counter-trend approach can help to stack things in your favor. With a little adjustment most traders can find a variation on this theme that can work well for them.
By Rob Mitchell of MarketTradersJournal.com