How to Trade Trends Within or Against the Trend

Most Forex traders start out by trying to catch that dream trend that will produce 500 pips with just 10 pips of stop loss! So that they can prove themselves to be exceptional technical analyst in front of their peers. However, most profitable traders in the world understand that while it is possible to find a trade like that, it is simply not worth their time to hit the home run every time. Profitable Forex traders make their bread and butter by trading small trends, within a bigger trend, and often against the prevailing trend. 

There are many ways to skin a cat and certainly the internet is filled with trading systems that try to do exactly that, catching small trends within a larger trend then going against it! Before we thrash out about how to get it done, let’s first identify what it means by trading within or against the trend.

Most people will tell you that it is a form of swing trading where a trader will try to enter positions against the prevailing trend to get some extra pips by trying to trade the retracements then reversing his position to trade with the trend. That is exactly right.

Let’s imagine any market situation, even not analyzing the market from different time frames; you can clearly see that often price goes enough against trends, that it appears the trend might be changing. But, alas! The next day, against your all positive expectation, price shoots in the direction of the original trend that you knew exists.

Because price is never going up or down straight (we wish!), and always ranging within a narrow upload or downward channel, we can identify those channels in order to successfully measure the “relative” top or bottom of a trend. Most trading platforms will offer some sort of tool to draw these channels. In technical analysis, we call them equidistant channels.

Before you go on your way to trade against the trend in order to capture few additional moves of the instrument you are trading, beware that this is one of the riskiest form of trading that you can ever follow. Nevertheless, once you have identified and drawn the equidistant price channel, by using Fibonacci channels, equidistant channels or Andrew’s pitchfork, don’t just blindly enter at the borders of that channel!

When markets are trending, they want to move in the direction of the trend because that’s the path of least resistance. As I teach more in-depth in my course and members area, when a market is trending it will make a strong move in the direction of the trend and then it will typically pullback or ‘revert to the mean’. That basically just means price will rotate back to its recent ‘average’ price, also sometimes called the ‘value price’.

Knowing this, we can look to trade from value in trending markets, because at the point of value in a market, the trend has the biggest chance of resuming. By looking for price action entry opportunities that have the confluence of the trend and the ‘value area’ behind them, we can significantly improve our chances of trading success. Let’s take a look at some examples of recent trades where we could have traded from value within a trend and how we would have lost money trading against the trend:

In reality, on an uptrend, the equidistant channel’s lower trend line that connects the lower low bars of the trend is the EXIT point. Similarly, on a downtrend, the trend line connecting the lower high of the trend is the EXIT point.

Expert traders will often utilize various technical analysis tools such as MACD divergence, overbought and oversold oscillators along with their line studies (the two trend lines which collectively draws the boundaries of the trend) to identify potential reversal points. Identifying reversal point is perhaps the most crucial part of trading trends, within the trend and against it.

Once you have successfully entered the trade, now use your trailing stop loss orders to follow the price to the lower (for uptrend) and upper (for downtrend) equidistant channel. Close your position when price reaches the trend line or tighten your stop loss in order to protect your profit. However, if you do not use trailing stop loss (it can be automatic, a 2 bar stop loss or ATR based), you run the risk to letting the trend turn back and hitting your stop loss.

The Trend Is Your Friend – Until It Ends

However, markets do not always trade in clear trends 24 hours a day, 7 days a week. There are stabilisation periods in every market, which are also known as sideways trends.

A market moves sideways when it’s at a point of indecision and buyers or sellers are at an impasse. Buyers and sellers test each other, but no pure consensus emerges. Here, most traders face two potential strategies: range trading or waiting for a breakout.

Trend trading

Trend trading is an attempt to profit by analyzing the momentum of an asset in a particular direction. When the price moves in one general direction, such as up or down, it’s called a trend.

Trend traders go long when an asset is trending up. Higher swing lows and higher swing highs characterize an uptrend. Similarly, trend traders can enter a short position when an asset moves down. Lower-swing lows and lower-swing highs characterize a downtrend.

Trend trading strategies assume that an asset will continue to move in the same direction it is currently in. Such strategies often contain Take Profit or Stop Loss provisions to lock in profits or avoid large losses in the event of a trend reversal. Trend trading is used by short-, medium- and long-term traders.

Most traders can determine the current trend. The tricky part is to decide how to act. Let’s continue with the uptrend example. Trend trading implies that you will either buy at support or on the break of resistance. In the first case, you will use such instruments as trendlines and Fibonacci retracements. In the second case, you can use continuation chart patterns like triangles, flags, and wedges.

Trend trading summed up

  • Trend trading is a strategy that involves using technical indicators to identify the direction of market momentum
  • Trend trading is usually considered a mid to long-term trading strategy, but it can in theory cover any timeframe, depending on how long the trend lasts
  • Trend trading strategies are designed to help you identify trends as early as possible and exit the market before they reverse
  • Broadly speaking, there are three types of primary trend: uptrends, downtrends and sideways trends
  • The most common trend trading strategies use technical indicators, including moving averages, the relative strength index (RSI) and the average directional index (ADX)
  • Without proper preparation and risk management, even the best trading strategy won’t make you money in the long run. It is important to have a plan for which markets you will trade and how you will manage your risk

Take profit

You can set your profit target at the previous high of the uptrend (low of the downtrend) or even levels beyond it if you are more confident in your trade.

Stop Loss

Notice that when you ride a trend, you can use a trailing stop that follows the trend. Be aware, however, that it may be not very easy to decide where to move a Stop Loss. The risk will be that a dipper correction will make the market hit your stop and close your order.

Scaling in

It’s allowed to add to a position when you follow a trend if the market already moved in your favor and your trade became profitable. This way your potential profit will increase. Don’t forget to adjust your risk management if you do this. You can also plan to start with a smaller trade than usual (for example, buy at the point 1) and then increase it when the price gets above point 2. This tactic will reduce your risk.

Counter trend trading

A counter trend is a correction in the price of an asset against the main trend. Simply saying, when the market is in an uptrend and pulls back, the pullback to the downside is a counter trend because it goes against the original market trend.

A counter trend trading strategy is an attempt to make a small profit by opening trade against the main trend. Counter trend trading is a form of swing trading that assumes that the current market trend will experience reversals or pullbacks and then attempts to profit from the pullback as the underlying trend continues. This strategy is medium-term, where positions are held for a few days or a few weeks.

Some traders who use this strategy for profit use pullbacks while maintaining their main positions in the direction of the trend. Countertrend strategies use momentum indicators, support and resistance levels, and candlestick patterns to identify possible market entry points. However, it is necessary that traders using this method be careful to resume the current trend at any time without warning. Thus, when trading with this strategy, proper risk management techniques such as Stop Loss orders and minimum position sizes should be used to limit losses.

Traders using this approach take hints from reversal candlestick patterns (pin bars, evening/morning starts, etc.). They also apply oscillators like MACD or RSI to see whether the market has become overbought/oversold and whether there’s a divergence between the price and the indicator. If these signs are present, traders open positions counter the previous trend.

Take profit

It’s harder to find a place to fix profit when you trade counter trend. The challenge is not to get too greedy. Remember that you bet against the market. Some trends can turn into a sideways market limiting profit of a counter trend position. The initial trend can also resume fast and not let the price correct too much. As a result, be careful and manage the risks.

Stop Loss

The location for a Stop Loss order in such a trade is natural. Traders put their Stop Losses behind the extreme point of the price from which a correction has started. The Stop Loss will likely be smaller than the one you would use if you traded the trend.

Scaling in

It’s not a good idea to meddle with your position size when you trade counter trend. The trade can be very short-term, so you risk getting yourself in an uncomfortable situation if you try to add to a trade. And never add to a losing position as it may lead to a bigger loss.

What Are The Types of Trend Trading Strategies?

Now we’ve understood the meaning of trend trading and their types. Let’s look at the strategies that many traders use to identify trends.

  • The MACD Trading Indicator
  • The RSI Trading Indicator
  • The ADX Indicator

Final Thoughts

After knowing the trend trading, their types, and strategies, any trader can apply these in their traders. Remember, before using them; they must be well-versed with all the strategies. Several experienced traders can make excellent gains from the market using trend trading strategies.
However, new traders can use several research data charts and candlestick patterns to analyze trends because implementing a strategy is vital as implementing any trading strategy.

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