Trading Against The Trend: Searching For A Black Cat
It is very difficult to search for a black cat in a dark room.
Especially if it’s not there.
In the previous article, we got familiar with the strategy of trading following the trend and now it’s high time to learn to trade against the trend. Perhaps, for your ears the phrase “trading against the trend” sounds weird and even perverted. Well, it’s like “driving the road on the wrong side.” Is it really possible? It turns out that it is possible, and with a proper professional level, this trading system can bring good profits. Now let’s consider this in detail.
Recalling the theory
We already know that a trend is a directed movement of the price. In general, trends can be divided into: short-term (days), medium-term (weeks, sometimes months) and long-term (years). For example, the whole of 2017 the currency pair EUR/USD demonstrated a definite bullish trend (this happens not every year). However, in the same bullish year, there were many bearish days, bearish weeks and even up to three bearish months (February, September and October), when the price was going down. Sure, professional traders couldn’t remain passive for up to three months, could they?
The very essence of trading against the trend is to timely spot these powerful moves against the main trend, make them work for us, earn a profit. It’s not as difficult as it seems.
For this purpose we should:
- Recognize a long-term trend.
- Work against it on rebounds, in other words we should follow a medium-term (or short-term, according to the situation) trend.
Keeping pace with the market
The market can’t constantly move in one direction (otherwise everyone who guessed the desired trend would be a millionaire), it inevitably rolls back a little against the main trend, then again goes forward. To put that another way, it can be expressed as follows: a person makes two or three or four steps forward, one back, then three steps forward – two back, then again forward, and so on without end. Here on this “reverse step” we catch the market.
What’s the main difficulty of this trading system? It’s the fact that trends always reverse without warning, sometimes almost instantly (on news, and sometimes without them), sometimes a little more slowly, but still – no one warns anyone. You need to see, think and act on your own.
So, we’ve just figured out that “trading against the trend” is just trading against the main trend or following a short-term or medium-term one. Now let’s repeat the key points of trading against the trend:
- We’ve just identified the key trend.
- We realize that it can’t always move in the same direction.
- We catch a rebound and earn on it.
That’s what you should do instead of chasing the market, hopelessly trying to adequately respond to each of its move.
An example of a reversing trend in the currency pair GBP/USD:
A black cat in a dark room of the market
It’s crucial not to confuse trading against the trend with the favorite occupation of many generations of investors and traders – searching for a “bottom” or “top” on the charts. It’s rather a safe thing if you use the archive of quotations. For example, you might dream something like this: “That’s the bottom. If I opened my position here and had it closed here, I would earn this sum.” However, in real trading, such hypothetical and light-minded searches often result in devastating losses. A newly-found “top” will most probably turn out to b e an ordinary correction, the price will proceed with its main trend. Secondly, the “bottom” you found in some “third sub-wave of the fifth wave of Elliot” can be just a brief stop in a long way down. Don’t look for black cats, instead act consciously.
General condition of success
It’s crucial for this trading system (and for Forex trading in general) to be able to reverse or in other words to get out of an obviously unprofitable position, thus stopping losses. So, it should follow the market direction, which brings profit. Technically, there aren’t any complications to do this, just a few clicks in the terminal. However, in terms of psychology, that’s a huge complexity for many folks, especially novice traders. We’ll talk about this in a separate article.
How to trade against the trend
To make your trading with this system effective, you need to follow the signals indicated in our article:
Buying the Call option
In order to buy the Call option within the trading strategy against the trend, you need:
1. From the list of currency pairs provided by the binary broker, 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, in other words you need to catch a bullish trend (a good signal is a breakout of the daily maximum of the price).
3. Buy the Call option and exit the market, taking profit.
Buying the Put option
In order to buy the Put option within the trading strategy against the trend, you need:
1. From the list of currency pairs provided by the broker, you need to 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, in other words you should catch a bearish trend (a good signal is breakout of the daily minimum price).
3. Buy the Put option and exit the market, taking profit.
- Trading against the trend requires a higher professional level than, for example, following the trend illustrated earlier. You can’t leave it alone, you need patience and time. So, when following the trend, it is even useful sometimes to close the terminal and quietly allow profit to flow. Unfortunately, in this case it won’t work, as you’re trading against the trend. You need to constantly keep your finger on the pulse of the current market situation.
- However, increased attention should not be expressed in fussiness – these are different things. One of the first signs of professionalism and that you already understand something in the financial markets, is that you understand that prices that seem to move very fast, in fact, are moving slowly. Do not fuss. If you act correctly and adhere to risk management, you will have enough time to reverse your trading positions.
- Learn to reverse on a demo account, ideally you need to bring this useful skill to automatism. When you’re online in different currency pairs, facing powerful movements (they often show up after the breaking news) you need to open against the trend, with a significant price movement in the opposite direction (for example, 150 points). Open a position following the correction, gradually reducing your losing position until they completely disappear.
- Do not try to monetize on the go. It’s foolish to try making money on literally every market swing, you won’t succeed in this case. Instead, you’d better take your profit from the trend you clearly observe.
Real trading with the Finmax broker
- Asset Type: USD/CAD
- Expiration: 10 minutes
- Bid: $75
- Quotation forecast: UP
- Press the “Buy” button and watch the result:
In order to buy the Put option in the Finmax trading terminal, go to finmaxbo.com and prepare the option, specifying:
- Asset Type: GBP/USD
- Expiration: 2 minutes
- Bid: $25
- Quotation movement forecast: DOWN
- Press the “Buy” button and watch the result: