Should you Trade the Trend or Trade Against it? 

Trend following and counter-trend trading are both viable strategies in forex.

But before you make a choice, carefully consider the pros and cons of each technique, your experience, discipline and risk management plan.

In today’s post, we will look at the two sides of each strategy; their pros and cons, and how/when to use them:

Trend trading

Trend following is when we try to take advantage of current or dominant market direction.

To trade it, you must first identify the direction of the market using some technical indicators like moving averages or the RSI, confirm it with trend lines or chart patterns, know if it is or would be long-term, medium or short-term.

Also, try to know the present stage of the trend (is it the beginning, mid-point or going towards its end?).

And lastly, decide how long you intend to stay in the trend, enter your trade in the established direction, and strategically set your sl and tp.

Benefits of trend trading/following

1. It can increase your chances of winning: Trends seem to persist more, last longer than counter trends, meaning, more opportunities to profit for traders who follow it.

2. Creates a calmer & less stressful trading atmosphere: Following the tide can simplify decision making process for you. You won’t rack your brain much to determine your entry point.

Potential drawback

1. Risk of reversal: The current pattern may unexpectedly change direction due to various market factors like change in market sentiment or other external influences resulting in losses.

2. False breakouts: Trend following are also prone to false breakouts. Here, the market may appear to be trending, then suddenly reverses. This can make you trade the wrong direction and lose.

3. Whipsaw market conditions: In high volatility where the market sharply moves in opposite directions, it can be very difficult for trend followers. You may face repeated “kick-outs”.

Counter-trend trading

The idea behind countertrend strategy is the belief that trends would experience reversals and corrections at a point no matter how dominant the direction is.

Here, you bet against the current tide, anticipating a reversal or pull back for profit.

Potential reversals are identified using technical analysis like price patterns or overbought/oversold indicators.

(Please note that this is a very risky trading technique and not recommended for beginners. It requires advanced experience, caution and strict risk management).

Possible benefits of trading against the trend (tide)

1. High profit can be made (if the trend reverses): Going against the tide can be profitable if reversal materialises quickly. You can buy low and sell high.

Drawbacks

1. Difficult market timing: To accurately predict reversals can be tough.

2. Determining the best place to position your sl can be difficult too (or tricky).