When Should You Go Against the Trend?

03/02/2015 9:00 am EST

Focus: FOREX

There are several advantages to trading with the trend, but there may be times when you might want to trade against it, says Marc Principato of SMB University Forex Training Program.

What makes prices in a financial market system fluctuate the way they do is traders entering and exiting the market for an infinite number of reasons. Some may be getting stopped out while others may be adding to a position. We can never know for sure the reasons why they may be acting a particular way at a specific period in time.

All traders at some point in their learning curve discover a way to observe the market that allows for more objective decision making. One of the most common concepts traders adapt is trading with the trend. The concept makes sense, but keep in mind every trading strategy has strengths and weaknesses. So is it better to be a trend follower? Is there any advantage to going against the trend? Can trend and counter trend concepts be used in conjunction to increase your probabilities?

Of course, there is no simple answer to these questions. It all depends on what type of trader you choose to be: scalper, day trader, or swing trader. Scalpers have the luxury of going with or against the current trend or momentum often because of the small profit targets they seek. Day traders are typically looking to capture a portion of the intra-day movement and are usually better off adapting to trend following strategies. The same goes for the swing trader.

One technique that I prefer to employ, when possible, is taking a counter trend setup on a smaller time frame that happens to signal a trade with the bigger picture trend. Is this really a counter trend trade? Not if my intention is to participate in a broader trend from a more attractive price.

For example, lets say we have identified a bullish trend on an hourly EUR/USD. The price is pulling back and when we look at this condition on a 15-minute chart, it appears to be very bearish. If my intention is to participate in the trend that appears on the hourly chart, should I be looking for short setups on my 15-minute? Of course not. I am interested in the greater potential, which is on the long side in this example. I will instead wait until the 15-minute chart starts showing signs of stability. I need to see a pre-defined support level hold along with other supportive price patterns and volume patterns that add to my long argument. Once it all lines up, it's a matter of assessing the risk relative to its profit potential, and if it makes sense, you have no more reason not to be in this trade. Time to pull the trigger and let the market do the rest.

As a professional trader, you cannot afford to be inflexible. By labeling yourself a counter trend trader or trend follower, you already place limits on your thinking. By combining both concepts like I explained in the example above, you can gain a greater perspective of the market's intentions. As you can see, it is possible to trade against your immediate trend, but in line with a broader trend, simultaneously. This game is all about how to process the information the market offers and act on it in such a way that minimizes risk while capturing its potential.

By Marc Principato, CMT, Director, SMB University Forex Training Program

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