do you know when to counter trend trade
TRANSCRIPT
Continuing in the series of increasing the probability of your counter-trend trades, this is going to cover another sign that the impulse move is running
into trouble.
Going back to the basics of a trending market, we have the impulse or
momentum move and we have the pullback in price.
Understanding this structure and the clues it gives you, can really improve
your trading results.
Virtually every chart you will look at looks something like this next graphic.
It's standard price structure in a trending market where, in a uptrend, the impulse moves are larger than the
pullbacks.
You can see a rhythm in price and nothing interesting is going on. I can hear people talking about buying the
pullbacks and although I will cover that issue in a future post, that's not as
simple as it appears.
In that graphic, there is nothing suggesting that counter-trend trading is the play to focus on. Believe it or not though, there are always those
people that will attempt to short any pause in the upward trending action.
Those people love to attempt to capture the top or bottom of the
market but end up adding to a losing position and taking larger than
necessary losses.
Eventually, all good things come to an end as the last buyers pile into the
move causing something different to occur in the price action and resulting
structure.
We have price "going parabolic" or perhaps forming a blow off top.
Regardless of what we call it, something interesting has occurred. We certainly have a change in state
compared to recent price action. This should have a trader paying attention
but is shorting a good idea?
If high probability trades are your interest, counter trend trades right now may not be the proper play.
Price has not shown anything that indicates a counter-trend trade should
be unleashed yet.
Often times what can happen after these moves is price simply
consolidates, works off the blow off, and then starts to work its way in the
direction of the trend.
The best play right now is no play. You probably would not want to trade the first pullback after this type of move
due to the extreme state of the market at this point. We need to see other
things occur.
Price had printed an interesting event to the upside and now, price prints an
interesting event in the pullback.
Compare the lengths of pullbacks and you can see that the second pullback is much more violent and larger than the
first one. This indicates much more selling pressure than this trend has
previously encountered.
Are the big players showing their hands? Would you be looking for a
long position at this point? Hopefully you said you would need to see more
evidence of upside potential but at this point, buying into this market is not a
solid play. How about shorting?
Let's look at what has occurred. There was an orderly uptrend of
price Price began to print a parabolic
move which should put you on alert An "out of character" pullback has
occurred
Tying that all together, now there is a bigger potential of at least another correction in price which you may
want to get involved in to the short side.
After such a large blow off in price PLUS the impulse move to the
downside, be on alert for another push to the downside as seen in this
picture.
Depending on your time frames, you may have to drop a time frame or two
lower to actually see this structure play out. Larger time frames can often
hide the details that you are able to capitalize on.
Does this indicate a trend change? The macro trend takes a lot to reverse so if you were to take counter trend trades from these moves, you may
want to keep your targets more on the conservative side.
Heading back to our stock chart of NDRM that I talked about here, did we
see this type of price action and structure occur?
The first correction was early in the morning after session open. It sets a
benchmark for pullbacks.
The following two pullbacks were unimpressive and although one came
close to the same size as the initial pullback, it was nothing to catch your
eye.
Although we don't have much of a parabolic move, the last bull candle was $1.35 from high to low which is bigger than most other price moves
per candle.
Price slams back, attempts a rally, and we have a gap in price. Price then
drops $7.57 which you can't see on this screen capture.
The point here is that there were clues in the price that alerted you to the possibility of a counter-trend trade.
The possible zone for entry was detailed in this article but you can see
the pullback after the gap down.
To wrap this up..price action and forming structure will most often alert you to the potential to go against the current trend. It may not be easy to
enter due to speed or liquidity issues, but it can also alert you to tighten up
the stops on longs or scale out of your position.
Jumping in front of momentum in either direction with a counter-trend
trade before you see patterns that can alert you to the softening of the trend is a quick way to drain your account.