Counter trend forex trading strategies is a type of trading strategy that involves going against the prevailing trend of the market. In other words, it means buying when the market is falling and selling when the market is rising.
Counter trend forex trading can offer some advantages, such as:
- It can provide more trading opportunities, as the market often moves in waves and retraces before continuing the trend.
- It can offer higher profit potential, as the market tends to move faster and more sharply during reversals.
- It can reduce the risk of being caught in a trend reversal, as the trader is already positioned in the opposite direction.
However, counter trend forex trading strategies also has some challenges, such as:
- It can be more difficult and risky, as the trader has to go against the dominant market sentiment and momentum.
- It can require more patience and discipline, as the trader has to wait for the right signals and conditions to enter and exit trades.
- It can be affected by various factors, such as news events, market volatility, and trading volume.
Therefore, counter trend forex trading is not suitable for everyone. It requires a good understanding of the market dynamics, a solid trading plan, and a robust risk management system. In this blog post, we will introduce you to some of the main strategies for counter trend forex trading, such as:
- Using oscillators to identify overbought and oversold conditions
- Using candlestick patterns to confirm reversals and enter trades
- Using Fibonacci retracement to anticipate reversals and enter trades
By the end of this blog post, you will learn how to identify and trade reversals using these strategies. You will also learn some tips and warnings on how to use them effectively and safely. Let’s get started!
Strategy 1: Using Oscillators
Oscillators are technical indicators that measure the momentum and strength of the market. They oscillate between two extreme values, usually 0 and 100, and indicate the degree of overbought or oversold conditions in the market. Overbought means that the market has risen too much and too fast, and is likely to reverse or correct soon. Oversold means that the market has fallen too much and too fast, and is likely to bounce back or recover soon.
Some of the popular oscillators that are used for counter trend forex trading strategies are:
- Relative Strength Index (RSI): This oscillator measures the speed and change of price movements, and ranges from 0 to 100. Generally, a reading above 70 indicates overbought conditions, and a reading below 30 indicates oversold conditions.
- Stochastic: This oscillator compares the closing price of a currency pair to its price range over a certain period of time, and ranges from 0 to 100. Generally, a reading above 80 indicates overbought conditions, and a reading below 20 indicates oversold conditions.
- Moving Average Convergence Divergence (MACD): This oscillator calculates the difference between two moving averages of different lengths, and plots it as a histogram. It also plots a signal line, which is a moving average of the histogram. Generally, a positive histogram indicates bullish momentum, and a negative histogram indicates bearish momentum.
To use oscillators to identify and trade reversals, we can look for three main signals:
- Overbought and oversold conditions: When the oscillator reaches an extreme value, it suggests that the market is ripe for a reversal. We can look for a confirmation from other indicators or price action before entering a counter trend trade. For example, if the RSI is above 70 and the price forms a bearish candlestick pattern, we can sell the currency pair.
- Divergence: When the oscillator moves in the opposite direction of the price, it indicates a weakening of the trend and a potential reversal. We can look for a break of a trendline or support/resistance level before entering a counter trend trade. For example, if the price makes a higher high but the MACD makes a lower high, we can sell the currency pair when it breaks below a support level.
- Convergence: When the oscillator moves in the same direction as the price, it confirms the strength of the trend and a continuation of the movement. We can use this signal to exit our counter trend trade or to avoid entering a trade against the trend. For example, if the price makes a lower low but the Stochastic makes a higher low, we can close our buy position or avoid selling the currency pair.
Some tips and warnings on using oscillators for counter trend forex trading strategies are:
- Oscillators are lagging indicators, meaning they reflect what has already happened in the market, not what will happen in the future. Therefore, they should not be used alone, but in combination with other indicators or tools.
- Oscillators can stay in overbought or oversold conditions for a long time, especially during strong trends. Therefore, we should not enter or exit trades based solely on oscillator readings, but wait for other confirmations or signals.
- Oscillators can give false or misleading signals, especially during sideways or choppy markets. Therefore, we should be careful and use proper risk management when using oscillators for counter trend forex trading.
Strategy 2: Using Candlestick Patterns
Candlestick patterns are graphical representations of the price movements of a currency pair over a certain period of time. They consist of a body, which shows the difference between the opening and closing prices, and a shadow, which shows the highest and lowest prices. Candlestick patterns can reflect the psychology and sentiment of the market, as they show how buyers and sellers interact and influence the price.
Some of the common candlestick patterns that indicate reversals are:
- Pin bar: This is a candlestick with a long upper or lower shadow and a small body. It indicates that the market rejected a certain price level and reversed its direction. A bullish pin bar has a long lower shadow and a small body near the top, indicating that buyers pushed the price up after a decline. A bearish pin bar has a long upper shadow and a small body near the bottom, indicating that sellers pushed the price down after a rise.
- Engulfing: This is a two-candlestick pattern, where the second candle completely covers or engulfs the first candle. It indicates that the market changed its sentiment and momentum. A bullish engulfing pattern occurs when a bearish candle is followed by a larger bullish candle, indicating that buyers overpowered sellers and drove the price up. A bearish engulfing pattern occurs when a bullish candle is followed by a larger bearish candle, indicating that sellers overpowered buyers and drove the price down.
- Doji: This is a candlestick with no or very small body, indicating that the opening and closing prices are equal or very close. It indicates that the market is indecisive and uncertain about the direction. A doji can have different shapes, such as long-legged, dragonfly, gravestone, or four-price. A doji can signal a reversal when it occurs near a support or resistance level, or after a prolonged trend.
To use candlestick patterns to confirm reversals and enter trades, we can follow these steps:
- Identify the trend of the market using trendlines, moving averages, or other indicators.
- Look for candlestick patterns that indicate reversals near key levels, such as support, resistance, Fibonacci retracement, etc.
- Wait for a confirmation from other indicators or tools, such as oscillators, volume, chart patterns, etc.
- Enter a counter trend trade in the opposite direction of the trend, with an appropriate risk-reward ratio and stop loss.
Some tips and warnings on using candlestick patterns for counter trend forex trading are:
- Candlestick patterns are not 100% accurate, meaning they can fail or give false signals. Therefore, they should not be used alone, but in combination with other indicators or tools.
- Candlestick patterns can vary in size, shape, and significance depending on the time frame and currency pair. Therefore, we should use them with caution and discretion.
- Candlestick patterns can be subjective and open to interpretation depending on the trader’s perspective and experience. Therefore, we should backtest and practice our strategies before using them in real trading.
Strategy 3: Using Fibonacci Retracement
Fibonacci retracement is a technical analysis tool that measures the potential retracement levels of a trend. A retracement is a temporary reversal or correction of the price movement, before the trend resumes. Fibonacci retracement is based on the Fibonacci sequence, a series of numbers where each number is the sum of the two preceding numbers, such as 1, 1, 2, 3, 5, 8, 13, etc.
To draw Fibonacci retracement on a chart, we need to identify the start and end points of a trend, either an uptrend or a downtrend. Then, we divide the vertical distance between these points by the key Fibonacci ratios, such as 23.6%, 38.2%, 50%, 61.8%, and 76.4%. These ratios represent the percentage of the original trend that the price retraces. The resulting horizontal lines are called Fibonacci levels, and they act as potential support and resistance levels for the price.
To use Fibonacci retracement to anticipate reversals and enter trades, we can follow these steps:
- Identify the trend of the market using trendlines, moving averages, or other indicators.
- Draw Fibonacci retracement on the chart using the start and end points of the trend.
- Look for price reactions at the Fibonacci levels, such as bounce, break, or consolidation.
- Wait for a confirmation from other indicators or tools, such as oscillators, candlestick patterns, volume, etc.
- Enter a counter trend trade at the Fibonacci level that shows the strongest reversal signal, with an appropriate risk-reward ratio and stop loss.
Some tips and warnings on using Fibonacci retracement for counter trend forex trading strategies are:
- Fibonacci retracement is not a precise or reliable tool, meaning it can fail or give false signals. Therefore, it should not be used alone, but in combination with other indicators or tools.
- Fibonacci retracement can vary in accuracy and significance depending on the time frame and currency pair. Therefore, we should use it with caution and discretion.
- Fibonacci retracement can be subjective and open to interpretation depending on the trader’s perspective and experience. Therefore, we should backtest and practice our strategies before using them in real trading.
Conclusion
In this blog post, we have learned some of the main strategies for counter trend forex trading, such as:
- Using oscillators to identify overbought and oversold conditions, divergence, and convergence
- Using candlestick patterns to confirm reversals and enter trades
- Using Fibonacci retracement to anticipate reversals and enter trades
We have also learned how to use these strategies effectively and safely, by combining them with other indicators or tools, waiting for confirmations or signals, and using proper risk management and discipline. Counter trend forex trading can be a rewarding and challenging strategy, but it requires a lot of practice and experience to master it.
We hope you have enjoyed this blog post and found it useful. If you want to try out these strategies or share your feedback, please leave a comment below. We would love to hear from you! Thank you for reading and happy trading!
