Trend Trading vs Counter Trend Trading

[Soultrader 12]

Trend trading vs counter trend trading. What type of trader are you?

 

I would like to discuss these two different type of trading styles. Some of you may be a trend trader while others do well at counter trend trading.

 

I personally find trend trading alot easier than countertrend trading. But this is a matter of trader preference. I have seen some unbelievably skilled countertrend traders.

 

Each style requires a different set of rules. Trend trading rules are simpler compared to counter trend trading rules. Buying a pullback or shorting a rally are the basic rules for trend trading. Buying a pullback to the 21 moving average is another example.

 

I am curious to know what kind of methods traders use in counter trend trading. From my experience this requires a more stricter set of rules. I would like to start with one of my own.

1. In a downtrend, I like to watch for a shift in market sentiment. A new TICK high is a good clue that I look for. I will then try to enter on a pullback of the TICK... vice versa for an uptrend.
   
2. In a downtrend, I like to watch for extreme TRIN readings of above 1.9-2.0. The markets have a tendency to bounce. (works better in the overnight session)

Does anyone else have any rules that they live by? Would love to hear your comments on this. Thanks

[ant 10]

When a market is trending, I primarily look to buy pullbacks and sell rallies - so I voted Trend Trading.

 

However, my favorite countertrend strategy would be trading divergences between market internals and price. This would be a scalp only trade where I'm looking to exit on a retracement. I would not let this trade go against me. When in a divergence trade, I use tight stops and expect it to work immediately or I exit (i.e., use a time stop). I would not attempt this on a strong trend day. I've done it and it wasn't pretty.

[carter 10]

I am more of a scalper but tend to play counter trend trades more often.

[torero 10]

I agree with Ant. One thing I also do is look for momentum or force index divergence from price for reversals in the first 30 minutes of trading since we don't know if the market has a trend already or not. Works quite well.

[carter 10]

I agree with Ant. One thing I also do is look for momentum or force index divergence from price for reversals in the first 30 minutes of trading since we don't know if the market has a trend already or not. Works quite well.

 

Do you watch for the markets to run out of steam and reverse by using momentum divergence? How effective have you found the 10:00am reversal? Thanks

[torero 10]

I watch the volume for exhaustion along with S/R. I use equivolume chart for that. The best indication of continuation after seeing a divergence reversal is seeing higher high and higher low until it stops making higher highs/higher lows. I use force index because it's vollume based, momentum is price-based. I use force index for opening while momentum is for daily charts possible reversals.

 

Here's an example.

 

Many times divergence don't work because price doesn't confirm it, meaning it prices need to go in the direction of the indicated direction for the trade to work. Confirmation is key.

 

I don't watch the clock although I'm aware of the possibility of its influence. The clock has more influence in the afternoon IMO, around 2pm.

[Soultrader 12]

Hi Torero,

 

Very interseting post. If the lower panel a force index indicator or a momentum indicator?

 

The concept of higher high and then price failing to make a higher high is such a powerful and yet simple signal. Its one of the first important things I learned from a professional trader when I was learning to trade.

[torero 10]

The previous chart shows the force index on the bottom. I use it for the first hour, then ignore it the rest of the time. By then I already have an idea what the market looks like after many bars have appeared since opening.

 

I usually get an idea of the last hour of the market the previous day but volume (or lack of) is very important in the morning to confirm the previous day's action. In some ways, the last hour is used and extended into the opening to get direction (higher high/higher low and lower high/lower low). You can see from the chart, the previous day action was already making lower high/lower low. So it continued down on opening, but volume sided with the bulls (shown on force index) and reversed. I waited for the next higher high, then on the higher low to make the entry.

 

Yep, my mentor taught me that before anything else. Everything else made sense later on after understanding this concept. Now you know my secret.

[namstrader 10]

I have my own method that was not taught to me but developed from months of observation. I begin to look for an entry after I see a three or four point trendline break with both the cci and rsi on the 3 and 5 minute charts. Not an absolute but I begin to salivate when they appear. Just look at historical charts and see for self when they appear.

[Soultrader 12]

The previous chart shows the force index on the bottom. I use it for the first hour, then ignore it the rest of the time. By then I already have an idea what the market looks like after many bars have appeared since opening.

 

I usually get an idea of the last hour of the market the previous day but volume (or lack of) is very important in the morning to confirm the previous day's action. In some ways, the last hour is used and extended into the opening to get direction (higher high/higher low and lower high/lower low). You can see from the chart, the previous day action was already making lower high/lower low. So it continued down on opening, but volume sided with the bulls (shown on force index) and reversed. I waited for the next higher high, then on the higher low to make the entry.

 

Yep, my mentor taught me that before anything else. Everything else made sense later on after understanding this concept. Now you know my secret.

 

Very true about the afternoon session being a continuation of the opening session. In the YM I have seen reversal take place in the morning while continuations take place in the afternoon.

 

Higher highs/higher lows & lower highs/lower lows...... one of the best concepts I learned early in my career as well. Thanks for sharing torero.