What Is a Countertrend Strategy?
A countertrend strategy endeavors to make small gains by trading against the current, more extensive trend. Traders likewise allude to the training as countertrend trading.
It is a form of swing trading that expects a predominant trend will see reversals and endeavors to profit from them as the trend proceeds. Countertrend trading is generally a medium-term strategy in which positions are held between several days and several weeks.
Figuring out Countertrend Strategies
A countertrend strategy targets corrections in a trending security's price action to bring in money. Contrarian traders frequently send countertrend trading strategies. The strategy includes buying/selling a security that has experienced a rash bearish/bullish move in the expectations that a corrective move higher/lower will allow them to sell/buy it back at that higher/lower price. The buy low sell high paradigm is fulfilled regardless and the trader's account is the beneficiary.
Traders who utilize this strategy acknowledge smaller gains and are prepared to stop themselves out should the expected correction not manifest itself. A countertrend strategy disregards the well known investment philosophy that the trend is your companion, for the present.
Countertrend strategies use momentum indicators, reversal patterns, and trading reaches to decide the best areas to execute trades. Traders who utilize this strategy ought to continuously be careful that a security can resume its trend all of a sudden and ought to subsequently utilize risk management procedures, for example, stop-loss orders, to limit potential losses.
Building a Countertrend Strategy
Traders can utilize momentum indicators, for example, the relative strength index (RSI), related to price support and resistance areas to find high likelihood defining moments. For instance, a countertrend trader might buy a security in the event that it finds support at a 52-week low and the RSI gives an oversold perusing below 30. On the other hand, the trader could open a short position on the off chance that the security's price arrives at a resistance area and the RSI moves over 70.
To add further confirmation, the trader might sit tight for a bullish or bearish candlestick pattern before entering the trade. The countertrend reach ought to be sufficiently wide to have a profit target that is something like two times as wide as the stop loss. For example, in the event that a trader is utilizing a $5 stop loss, the profit target ought to be something like $10.
Benefits of Using a Countertrend Strategy
Additional Trading Opportunities
At the point when the price of a security wavers inside a trading range, it presents numerous opportunities to buy at support and sell short at resistance. An investor might need to sit on his hands for an extended period on the off chance that he just trades pullbacks in a trending market.
Countertrend strategies ordinarily have shallower drawdowns compared to trend-following strategies, as traders take smaller profits all the more consistently. Albeit a trend strategy might deliver more substantial gains overall, the trader might get stopped out various times before catching a large move.
Limitations of Using a Countertrend Strategy
Following up on additional trading opportunities brings about paying more commission charges. Traders who utilize a countertrend strategy and expect to make a critical number of month to month transactions ought to consider utilizing a per-share commission structure. This means the broker charges a flat fee per share instead of a per-trade fee. Traders then, at that point, just pay a commission for the number of shares they trade, which allows them to scale all through positions all the more economically.
Countertrend moves don't last insofar as trending moves; hence, traders need to habitually monitor the markets to find the best entry and exit points for their trades. Traders can mechanize their countertrend strategies to conquer this limitation.
- Countertrend strategies use momentum indicators, reversal patterns, and trading reaches to decide the best areas to execute trades.
- A countertrend strategy targets transitory corrections in a trending security's price action to profit.
- The strategy includes buying/selling a security that has experienced a rash bearish/bullish move in the expectations that a corrective move higher/lower will allow them to sell/buy it back at that higher/lower price.