Sooner or later, trend do end, and these situations can most often be exploited for hefty profits. However, counter-trend trading is inherently riskier and more challenging than trading with trend. As a consequence, you should try it only after you have fully mastered trading with the trend.
The majority of counter-trend models are looking to sell overbought levels and buy oversold levels and generally have shorter duration trades. The disadvantage of these models is that they have a hard time in steady, trending environments.
Buying bottoms and selling tops
Many traders avoid assuming counter-trend positions, especially when a market is crashing. As the saying goes, “don’t try to catch a falling knife”. However, if you read the context correctly, this could be wrong for at least 2 reasons:
- Trying to sell the tops and buy the bottoms provides you the opportunity of a trade where the risk is the lowest and the profit potential is the greatest.
- Waiting for confirmation of the tops/bottoms reduces the trader’s fear of a potential loss, but it also increases the risk that must be assumed and the reward that can be obtained.
Major highs and lows attract interest more than any other charting landscape feature. This brings a large supply of participants but also invites more whipsaws and unexpected outcomes.
What is important for you to remember is that there are no such things as a 100% reliable way to pick a top or a bottom. A strategy that can do it 60% of the time would be considered an exceptional one.
Conclusion: counter-trend systems can provide consistent short-term profitable trades, but require you to revert your instincts and trade against “the herd”.
- Your progress 92% 92%