Forex Trading - Counter-trend Trading

 


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Statistics like “the market only trends 30% to 33% of the time" are thrown around. Whether that's true or not, I don't know. But suppose that the markets trended half of the time. That would still mean the 50% of the time the markets were range-bound.

I further suspect that the numbers above are correct because of the number of small traders in the forex market. Small traders have a way of disrupting trends. (That's why the large institutional traders don't like them!).

One way or another, however, we know that the market is trendless a significant amount of time. If you continue to try to trade a trend system during these times, you'll either get no trades (if you're lucky), or you'll get a lot of choppy losing trades.

A better way to go about this is to use a counter-trend trading system. A counter-trend system looks to do the “impossible". It looks for the high and low in a market. It figures that if it finds a high or low, the market will reverse from there (because it's trendless) and you'll have a good trade.

So what is a good counter trend trading system? I'd recommend starting with Bollinger bands. The basic principle is to trade tags off of the upper and lower bands.

However, if the market is in a trend, you'll get eaten alive. So it's necessary that the bands be totally flat or almost flat.

Yet, still I'd add an oscillator like Stochastic oscillator to help confirm tops and bottoms. One of the beauties of a counter trend system is the ability to use very tight stops. You'd place a stop just outside of the band that had just been tagged. Shoot for a profit target that's just under the middle line of the bands.

Do you want to learn more about how I trade? I have just completed my brand new guide, “Forex Trading - What Finally Worked For Me".

Download it free here: Forex Trading

Nathan Pennington is a forex trader and the author of Winning Forex Trading -THE Definitive Guide

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