Trading against the Trend: Looking for a Black Cat

Published:23 March 2018 Updated:4 January 2024

It is very difficult to look for a black cat in a dark room.
Especially if it’s not there.
Confucius

In the previous article we reviewed trend trading strategyAnd now it’s time to start trading against the trend. You have to admit, the phrase “trading against the trend” sounds quite strange, and it’s a bit off-putting. It is like “driving oncoming traffic”. Is it really possible? It turns out that it is possible, and with the proper professional level this trading system brings good profits. But first things first.

 

Recalling the theory

We already know that a trend is a directional price movement. We can divide trends into: short-term (days), medium-term (weeks, sometimes months), and long-term (years). For example, the whole year of 2017 on EURUSD was a pronounced bullish trend (this does not happen every year). However, in the same bullish year there were many bearish days, bearish weeks and three bearish months (February, September and October) when the price was going down. We can’t just sit for three months without work, can we?

The essence of trading against the trend is not to miss these powerful movements against the main trend, to make them work for us, to bring profit. This is not as difficult as it seems.

To do this, we must:

  • recognize a long-term trend and
  • work against it on pullbacks, i.e. follow the medium-term (or short-term, as the case may be) trend.

 

Keeping up with the market

The market cannot always move in one direction (otherwise everyone who guessed the right trend would be a millionaire), it inevitably pulls back a bit against the main trend, then goes forward again. Figuratively, it can be expressed as follows: a person makes two or three or four steps forward, one step backward, then three steps forward, two steps backward, then forward again, and so on without end. This is the “backward step” where we catch the market.

What is the main difficulty of this trading system? That trends always reverse without warning, sometimes almost instantly (on the newsSometimes even without them), sometimes a little more slowly, but still – no one warns anyone. You have to see, think, and act.

So, we figured out that it is correct to call “trading against the trend” “trading against the main trend for a short- or medium-term trend”. Once again:

  • Identified a major trend,
  • Clearly understand that forever moving in one direction it can not,
  • We waited for the pullback and took profits on it.

That’s it, there’s nothing else. Only this way, consciously, not “running” after the market, reacting to every fluctuation.

An example of a trend reversal for the currency pair GBPUSD:

Example of a trend reversal for the currency pair GBPUSD

For clarity, we opened a terminal of FinMax broker, you can also open a demo account there to test your tactics.

 A black cat in a dark market room

It is important not to confuse trading against the trend with the favorite activity of many generations of investors and traders – with the search for “bottom” or “top” on charts. In history (historical data, quotations archive) it is quite harmless: “Here is the bottom … and here is the top … if I had opened here, then … and if I had closed here, the profit would have been so-and-so …”. In real trading these searches can end in ruin. The “top” you find will turn out to be an ordinary correction, the price will continue to move upwards. The “bottom” you find in some “third sub-wave of the fifth Elliott wave” will only be a stop on the long way down… Don’t look for black cats, act consciously.

Prerequisite for success

It is vitally important for this trading system (as well as for trading in general) for us to be able to “flip”, i.e. to exit an obviously losing position, cutting off losses, and open to the side that brings profit. Technically there are no difficulties, just a few clicks of the mouse in terminal. Psychologically – a huge difficulty for many people, especially for beginner traders. We’ll talk about this in a separate article.

 

How to trade against the trend

In order for your trading on this trading system to be effective, Follow the signalsThe following are the examples in our article:

Buying a KOLL option

In order to buy a KOLL option on a counter-trend trading strategy, you must:

(1) From the list of those represented at the binary broker of currency pairs to choose a pair with a long-term bearish trend;

2. Choose the moment when the short-term trend will go against the long-term trend, i.e. “catch” a bullish trend (a good signal – a breakdown of the daily maximum price);

3. Buy a COLL option and exit the market, taking a profit:

How to Trade Against the Trend: Buying a Koll Option

Buying a PUT option

In order to buy a PUT option on a counter-trend trading strategy, you need to:

1. from the list of those presented at the broker currency pairs choose a pair with a long-term bullish trend;

2. Choose the moment when the short-term trend will go against the long-term trend, i.e. “catch” a bearish trend (a good signal – breakdown of the daily price minimum);

3. Buy a PUT option and exit the market having taken a profit:

How to trade against the trend: buying PUT option

 

Tips:

  • Trading against the trend requires a higher professional level than, for example, the previously discussed trend trading. You can’t leave it to chance, it requires a lot of attention, i.e. time. If, when trading along the trend, it is even useful to sometimes turn off the terminal and quietly let profits flow, then it will not work against the trend. You must constantly “keep your hand on the pulse” of the current market conditions.
  • The above (increased attention) should not translate into fidgeting, these are different things. One of the first signs of professionalism, that you already understand something in the markets, is the realization that prices, which outwardly move very quickly, actually move slowly. Do not be fussy. If you act correctly and comply Risk ManagementYou’ll have plenty of time to “roll over”.
  • Learn how to “flip” on a demo account, ideally you should bring this useful skill to automatism. In online mode, on different currency pairs, on powerful movements (they are often on the news) – open against the trend, if the price moves significantly in the opposite direction (for example, 150 points) – open along the trend, gradually reducing unprofitable positions until they are liquidated.
  • Don’t try to monetize, to take profit, on every market fluctuation, you won’t make it. Taking some profits on an obvious trend is our task, quite realistic.

 

Real trading with Finmax broker

In order to buy a COLL option in Finmax trading terminal, follow these steps by going to finmaxbo.com and preparing an option by specifying

  • Asset type: USDCAD
  • Expiration: 10 minutes
  • Bid size: 75$
  • Forecast of movement of quotation: UP
  • Click the “Buy” button and watch the result:

How to trade against the trend at Finmax: Buying a Koll Option

In order to buy a PUT option in the Finmax trading platform, follow these steps by going to finmaxbo.com and preparing an option by specifying

  • Type of asset: GBPUSD
  • Expiration time: 2 minutes
  • Bet size: 25 $
  • Forecast of movement of quotation: DOWN
  • Click the “Buy” button and watch the result:

How to trade against the trend at Finmax: Buying a PUT option

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