Trading against the trend
Hello ladies and gentlemen, forex traders. We all know the saying, “Trend is your friend.” But sometimes, one wants to go against the movement ... After all, kickbacks are very strong and seem easy profits.
This impression is misleading: trading against the trend is much more difficult than following the trend, you need extreme care and the ability to enter the deal on time, preferably with a short stop loss. What to look for at the entrances, what to set goals and stops, as well as about the secret tactics of choosing an entry point, we will talk in a new lesson on the Price Action methodology.
Is it possible to trade against the trend? And if so, how to do it right?
Hello ladies and gentlemen. In this lesson we will talk about trading against the trend. Trading against the trend is dangerous, it very often leads to losses. But there are situations when you really want to enter a deal, although it is against the trend.
In general, I will not recommend you trade against the prevailing movement. But if such a situation arose when you really want to enter into a deal, then at least do it right.
And how to do it right, we will talk further.
Why is trading against the trend so dangerous?
The fact is that when we look at a history on a chart that has already occurred, is already “drawn”, and not at prices that exist in real time, we pay attention to extremes, but do not pay attention to what preceded them.
And we see that there was a setup at the top, and you could enter and take a good profit.
It seems that the entry against the trend will be very, very profitable. But the fact is that we are losing sight of the moments when the price has been moving up for some time, drawing some kind of setup, but as a result it continued to move in the same direction. And if we entered against the trend, we would have lost many points. And, accordingly, - real money.
Let's look at how this happens.
Here is a chart of the USDCAD currency pair. What do we see? For a long time, the upward trend continued. It would seem that the price has already increased significantly. There were long candles, after which the rollback most often occurs. And a pin bar looms. It would seem that it is worth entering into a deal and opening sales.
What would happen if we went into sales?
So ... Another strong bar is drawn up. Let's measure it, 100 points of possible loss. That's what would happen if you went on sale here. We look what happens next. We have another bar. Then another bar up, rather long. And a pin bar appears. Most traders will decide that now it’s certainly time to sell!
Why is it necessary to be very careful here?
Many traders lose their deposit in just such situations. Because then what happens is not at all the movement they were counting on ... We got a doji down. If you were to enter using a pending order, i.e. If you put a pending order to sell just below the low point of our pin bar, then sales would be activated. So, you are in the market. But what awaits you: profit or loss? The price went up a little. But the stop loss, which, as we recall, according to the rules of the pin bar, needs to be placed above its tail, in this case - the top one - has not yet been knocked out. We wait. Another neutral candle appeared. And behind her is another pinbar. He knocked out our stop loss.
And what would happen if we entered the previous pin-bar?
What would happen if we decided: now everything is exactly right - you can enter 100%. Some increase the lot, in the belief that now there will definitely be a strong downward movement. After all, the price can not grow indefinitely? And one more pinbar. The next day - a bullish candle. The price rises by another 120 points. Next is drawn another pinbar. Well, now that's all for sure, with a probability of 1000% the price will go down! Because how much you can draw pinbars, now certainly there will be a powerful pullback! Everything, the price is bound to fall. Let’s say that now you enter the sales. The price went down a little. If we entered a pending order, now it would be activated. Next comes the neutral bar. AND…
Our stop loss is knocked out again! And doji is drawn.
Now you understand why the inputs against the trend are very dangerous?
Because when we look at a story on a chart that has already passed, we pay attention only to extremes. Only on them. And they have all the setups, since they are extremes, of course, turn out to be profitable.
After the doji, the price really went down. It is not yet clear whether it will go further down or turn around and continue the trend up. But the bottom line is that the price can rise very, very long. Moreover, and without kickbacks.
Also trade against the trend should be distinguished when there is a clear trend, and you are trading against it, trying to enter the market against the trend from trading in the range. That is, when there is no clear movement, some kind of general trend up or down, but there are zigzag movements. Well, here it is, for example:
The situation when the trend is unclear, when it is not clear whether the bulls or bears are prevailing now, we trade as usual, as if we were trading in a trend, but we set more modest goals. That is, we trade from level to level, as in the case of range it is not known where the price will go. It will beat off the level or move on, forming a new trend - we do not know.
Therefore, acting in conditions of uncertainty, we set small goals: we entered the deal, the goal is the nearest level. We trade as carefully as possible from level to level, do not hold a position for a large amount of time.
Trading in a range is more dangerous than trading with a trend, but less dangerous than trading against a trend.
What are the signs of a good setup against the trend?
Firstly, our entry should be preceded by a strong movement, as in the parsed example with USDCAD. That is, there must be a long and strong trend up or down.
In this case, the candles should be large, large in size compared to the previous ones. Compared to the average candlestick size of this chart, this time frame and this currency pair. That is, candles should stand out on the chart. For example, like this candle:
SecondlyThere should be space on the left. What is meant?
If there is any movement that you think is trending, and you are going to enter it, but you see other candles on the left, then most likely this is not a trend, but a range. But if these candles are far enough from your potential entry, then the trend is not very strong and the entry is not justified. It turns out this is not a range, and not against the trend, but it is not clear what. As they say, the market decides where to go. In such situations, it is better to refrain from entering and wait until the movement manifests itself.
Thirdly, you can consider entering the deal if there is a double top. If the previous peak was not so far, or far away, but in this case it will not be a double peak, but an emphasis on the level.
About the double top, see a separate lesson, we recently analyzed this pattern.
Alsoif the price ran far away, and at the same time it hangs in the air, and there is no support for the level, that is, when you move the chart away - this peak has not been met before, or met, but very, very long ago.
Let’s say, as an example. I rewound the daily chart until 2009, and this peak did not occur.
This price was earlier for this currency pair, but this price did not form any extremes anywhere nearby. Therefore, there is no reliance on the level here. And if there is no support on the level, then entering is dangerous.
Are there any moments when the entry is more justified?
Yes. If the price rests at any level. Often, especially for those who trade within the day, it can be useful to go to the time frame above and see what happens there. Here we have daily charts. Let's mark our peak level.
Suppose we are going to enter here, and now move on to the weekly schedule. Let's see what kind of level this is and what happens on the weekly charts? On weekly charts, we have long candles, there is space on the left, a clear trend up, and a pin bar. If we give our schedule a little, then what will we see? Has this peak met before?
Not met, the entrance is dangerous. And on the weekly charts there is no level. If the level that we noted was on the weekly charts, the entry would be more justified. But we do not have a level on weekly charts, so we work with what we have. Nevertheless, do not forget, in case of doubt, to glance at the older time frame.
So, I have listed several signs of a good entry against the trend. But sometimes even these signs are sometimes not enough, because such signs as long candles, the space on the left, the presence of any setup that is natural for entry - all this does not give us complete confidence, since the price may well continue to move.
And yet, if you need to enter the market against the trend ... When is the best time to do this?
Firstly, you should wait for all those signs that I spoke about earlier. And besides this, wait until the price draws the high at least on the same level at least twice in a row. In this case, we can see it on the chart. The price hits almost the same level.
The price at which they sold was 1, 1121. The price does not have to beat point by point, it is enough to beat off within narrow boundaries. Plus or minus two to three points. And when you see that they are selling from one point for several days in a row, that is, they are not allowed to go higher, this is a sign that you can enter the sales. This is a sign that the trend has at least slowed down and at least there will be a correction.
Because on daily charts, in order to keep the price below a certain level and sell over and over again from this level, you need a lot of assets and a lot of resources. This means that the market is a strong player.
Therefore, in the case of a strong long-term trend, we wait until the price breaks at least twice from one price level, and only then enter. Moreover, it is best to enter close to this level. And of course, you need to enter with a pending order.
In this case, where can this be best done?
Here we have a candle drawn and beat off the price of about 1.1120. And another candle was drawn, strayed from the same price, a couple of points below. Let's set the level. What does that mean? This means that we are building a new level from which they sell.
After our second candlestick closed, which was beaten off by the same high point, we place a pending sell limit order not far from the level. Note where would we place a pending order? I remind you that our price has strayed from the level of 1.1120, so we set it at 1.1105. We place a pending sell limit order, since the price at the moment of closing the dodge is lower than the price at which we want to enter. And stop loss is just above the level. At about the same distance at which we entered below the level - at the same distance above the level we set a stop loss.
What is the goal to set?
If you enter against the trend, you should not set any large goals, so our goal is the nearest level. In this case, the nearest obvious level is far. Therefore, you can hold, but you can play it safe and just increase the stop loss by a factor of 4. In this case, we have a stop loss of 40-45 points. Let's multiply by 4. It turns out 160 points. But as you can see, the price has already reached this level. Our take profit would already be taken in this case. And the deal would close with a profit four times the given stop loss.
This is how you should go against the trend.
If we had a level here, then we could enter easier: by setup, by pinbar, which would be with a reference level. In the case when there is no level, we are waiting for its formation, that is, when the price pushes off from a price mark twice.
These bars may not necessarily go in a row. Between them there can be one or two candles. But don’t expect too many candles: five bars have passed, you can look for some new setups.
If we had purchases, we would have waited for the price to bounce twice from one price. They would wait for the low of two candles to become approximately on the same level. This would mean that a large seller buys from this level. Also, if we entered the setup from the level against the trend, then the stop loss would be according to the setup rules.
A couple of tips for intraday traders
You can go from the level of the previous day. Take the high point or low point of the previous daily candle for the level when you are trading intraday, monitor the daily levels and use the average daily range as the goal, or just close at the end of the American session, that is, in the evening. What do I mean when I say take the average daily range as a goal?
This is the average candle size from high to low of a given currency pair. That is, if the average candle size from high to low is, say, 100 points, and the price has already passed 80, then it is naturally better to go out, since the probability that it will pass some large number of points is very, very small. How to find out the average daily range?
The average daily range can be viewed on the ATR indicator, as well as on the website www.forexticket.ru:
- Visit this site.
- Find the Forex Volatility section.
- Select the desired currency pair in the list, say GBPUSD.
There is an average candle range from high to low even by the hour, for those who love extreme trading - starting from M1.
There is an average daily range from high to low on different days of the week. Here we have on Wednesday over the past 10 weeks an average of 113 points. So much the average price goes from high to low. On Thursday, an average of 91 points, 110 on Friday, on Tuesday - 84 points. On average, you can say 90- for the pound dollar, the average daily range.
Accordingly, if the price has already passed 80 points since the beginning of the day, then it is pointless to open any new positions and go in the direction the price went. And to expect some super-profits is also pointless. Better go out. When trading intraday, consider these data.
Let's look at a few more examples.
Here's an interesting example: such a massive collapse on H4 began and a long-tail pinbar appeared. By the way, here we also had reliance on the level. It would seem that you can enter. But if we entered here, then this next one would be the immediate goal, the closest level.
And as we see, the price did not reach him. If you still entered here and saw tails, when the price didn’t reach the target a little, it means you need to leave earlier. They saw the price almost reached your target and drew a tail - go out.
Therefore, when trading against the trend in general, and especially within the day, it is worthwhile to carefully monitor the price behavior. The slightest signs that the trend will continue, and you entered against it, exit. It would be better if there would be some penny profit or a small loss, but treat the inputs against the trend as some kind of flammable substance.
One interesting moment of a successful entry against the trend
Sometimes on the daytime and intraday bars there are such long tails as here.
This is a good time to enter. When the candle with such a long tail has closed, you can enter immediately. Because it means that they are very hard buying or selling, and there will be an impulse down. After such candles, this usually always happens. In such a deal, you can already sit longer. Not even to the nearest level, but to the next level. And take a very, very good profit.
This is a bit of a free treat from the market. Because everyone will come here. Do not forget about the feet - to put either by the tail, or near the end of the tail, otherwise nothing. Because there are still bursts when trying to knock out those who entered on this tail. This is also normal. Here you need to put a big stop, but the profit is often also very large.
Another good login example
A strong upward surge against the trend, you would enter at the close of the candle and then the price went lower. It was possible to sit to the nearest level. And to the next level. To the next level, probably the best option.Here it was possible to take 129 points, on H4 it is very, very good.
If there is any very prominent large tail, this is a good point. Even if the deal is against the trend.
Let's look at a purchase example. On the same chart, there was a strong downward movement, and then the price stalled. As soon as we see that the price has stalled, this is a sign that we need to prepare. Here she fought off three times from one level. After this dodge, we could put a pending buy limit order. Almost at the same price low for this tailed candle, then low for this small one, and the next one. And at this dodge we could enter. Stop-loss is slightly below the level, at about the same distance as the pending order.
As we see, the price we made a false breakdown, slightly went beyond this price limit. But the stop was not touched, and the price went up again. Here you could sit to the nearest level. But they could have come out later, but they would have made a profit. And one could sit longer, but in the case of movements against the trend, sitting for a long time is dangerous.
I would go here either at this level, it depends on how you marked it, there would be a take profit a couple of points below, a take profit a couple of points above. If there was no tech profit, I would go out on this candle, since a long tail in this case means a danger to the position. And I would take a profit - 30 points. These are 4-hour charts, and stop loss is only 10 points.
That is, even if we closed after this tailed candle without taking take profit, the profit would be 3 times more than stop loss. And if they took a take profit, then the profit would be about seven times more than a stop loss.
Summary: Thus, to summarize, we can say that it is possible to trade against the trend, but very, very carefully. If you are a beginner, I would not advise you to open against the trend at all, only on strongly “tailed” candles. This is the only exception on which even beginners can enter, while not forgetting the care.
I remind you that you need to look at the price more vigilantly when trading against the trend. The slightest hint that there will now be a U-turn against your position - exit.