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Counter-Trend Trading; If You Must!

Counter-Trend Trading; If You Must!

Before I kick off I would like to clear the air, I consider myself first and foremost a trend trader as I much prefer to trade with the market flow. In fact, more than 99% of my annual trades are with the trend. I do however know that I am not a reflection of all traders out there and many do counter-trend trade, and do it well. I want to share with you a way of building higher probability counter-trend trades using the same technical tools I use for trend trading.

Here is a list of some of the technical tools I use to trade:

  • Convergence of MACD and RSI
  • Horizontal Levels
  • Support & Resistance
  • Small Bullish/Bearish Candles

With a mix of these “ingredients” I can build a plan that is far stronger than just buying a market that is falling which is what this example below of EURNZD will show.

First the weekly of EURNZD (below)

20151028 twp1

As shown in the weekly chart price has fallen pretty hard over the past few weeks to a strong level of support and resistance. With such a big move down there is an expectation that price may now bounce and if it were to happen then this support level would be a logical place for it to occur from.

This is where many may make the mistake to buy – price is at support and there could be a bounce, this is not enough of a reason to try and catch a falling knife.

Let me move to the daily time frame now (below)

20151028 twp2

The black line you see on the chart is the same support line from the weekly. Note how price has not closed below this level since testing it. Also note the small bullish candles over the past couple of days. Indecisive candles and bullish candles, both small can often be a reflection of a move in the opposite direction is looming. It is still not enough of a reason to trade though so let me drill down to the 4 hour chart (below).

20151028 twp3

The beginning of a trend change is occurring with a possible higher low, in fact there are 2 equal higher lows. All that is needed for this to become an uptrend is a higher high to form. Price is consolidating.

Now to the 1 hour chart (below).

20151028 twp4

There are now 3 touches at a resistance level on the 1 hour chart. A break of this level will mean a break on the 4 hour into an uptrend. A break of resistance can often be the next leg up in a move, in the case of a counter-trend trade it can be the first leg up. I also like that the indicators are also starting to converge on the resistance level too. If a break was to occur I would feel confident the indicators would also break to new highs and therefore be convergent.

Again I would like to stress that by no means am I saying I believe that EURNZD is going to move higher. This post is simply to help provide an insight into possible ways to increase your success if counter-trend trading using some simple techniques that are taught in the CMC Advanced course.

Happy trading!

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