Counter Trend Trades (Trading Against The Trend) By Russ Horn 1
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Counter Trend Trades The basic Tradeonix system was designed to trade with the trend. Using the TBL, we can easily determine what direction the trend is moving. Trading with the trend is safe. Trading with the trend is productive. Trading with the trend is high probability. The market moves well in the direction of the trend, but it also moves against in the opposite direction. The trend can't last forever, and knowing how to take advantage of the market moves when they go in the opposite direction can add to the bottom line. Trading against the trend isn't as simple as it sounds. The direction of the trend is the direction the market is most likely going to move. If we are going to trade against the trend, we want to have a good reason to do so. If we are going to trade against the trend, we want to ask ourselves, "why is this a good trade to take?" 3
What Makes A Good Counter Trend Trade There are a few reasons we would consider taking a trade against the trend. 1. Support and resistance levels 2. Trendlines 3. Patterns 4. Regular Divergence We will cover each of these points, and you will quickly see that many of them will overlap each other. With the introduction of Divergence, I will be introducing an indicator to you. This is the RussMACD. For this manual it will be the usual MACD that you may already be familiar with, and to keep things simple, we will only use the histogram. Image 1 4
Counter Trend Trade Signal Before we look at the counter trend trade setups, I want to quickly discuss an actual entry signal. What do we need to see to place a trade. There are 2 phases to any trade. 1. Setup. 2. Signal. Not every setup will yield a signal. When we look at the reasons to take a trade, we will be looking at the variety of setups, but right now, I want to look at a signal. It's simple, every indicator will be in the direction of the counter trend trade with the exception of the TBL. In a long trade, the Switch + TBS + TBM will be bullish while the TBL remains red. In a short trade, the Switch + TBS + TBM will be bearish while the TBL remains green. Image 2 5
When you get a signal to go long: 1. Price will be above all the indicators on the chart. 2. The most recent Switch will be blue. (It can appear on the signal candle or earlier). 3. The TBS will be under the price and be green. 4. The TBM will be under the price and be green. 5. The TBL will be red. 6. Tetragram will be grey. When you get a signal to go short: 1. Price will be below all the indicators on the chart. 2. The most recent Switch will be red. (It can appear on the signal candle or earlier). 3. The TBS will be above the price and be red. 4. The TBM will be above the price and be red. 5. The TBL will be green. 6. Tetragram will be grey. Image 3 6
Stops And Targets The Counter Trend trades will place Stop Losses and Profit Targets in the same manner any other Tradeonix trade would play out. In a Long trade: 1. Stop loss will be placed just under the TBM. 2. Stop loss will be trailed along the TBM as each new TBM dot appears. 3. A conservative Take Profit will be placed as a 1:1. In a Short trade: 1. Stop loss will be placed just above the TBM + the spread. 2. Stop loss will be trailed along the TBM as each new TBM dot appears. 3. A conservative Take Profit will be placed as a 1:1. Image 4 Now that we have seen what a signal looks like, let's take a look at the setups. 7
Support And Resistance Support and resistance levels are commonly acted on as areas of market reversal. Trades watch for these levels and will trade once the market can in some way be confirmed to bounce off one of these levels. For us, a confirmation of a BOUNCE off either support or resistance will be a Tradeonix signal. Support Price will bounce off an already existing level of support. Ideally, this level is not too far away, and it could be close enough to form a nice double bottom chart pattern. As long as the level of support is clear and price looks to be making a bounce from it, this will constitute a good long trade. Image 5 8
Another example of support: Image 6 And another example of support: Image 7 9
Resistance Price will bounce off an existing level of resistance. The market will make a high and then recede from it. Later on, price will reach back to the same level of resistance. The bounce off the established level of resistance will be followed by the signal to go short. Image 8 10
Another example of resistance: Image 9 And a third example of resistance: Image 10 11
Trendlines Trendlines are angled, or diagonal, areas of support and resistance. Unlike horizontal support and resistance levels that see the market bounce, we will be using trendlines when the market breaks though them to validate a signal to go long or short. For us, a confirmation of a BREAK through and a close past a trendline will be a Tradeonix signal. When it comes to a trendline, we are looking for definite bounces off a trendline, not a tight movement along it. If the market hugs the trendline quite tightly, any close past the trendline will likely be just market noise and not a real move in the opposite direction. We want the market to make very clear bounces off a trendline in order for it to have any kind of strength, or to be taken seriously. Image 11 12
Bullish Trendline A Bullish Trendline is one that appears over top of the price in a downward market. The trendline itself will also be sloped downwards. Once we establish an ideal looking trendline, a close above the trendline will signal a trade to go long. To draw a trendline, we want at least 2 points of reference. We want a high followed by a lower high. We will connect the two highs and extrapolate the trendline ahead of the price. In the example, the TBL is red showing a downtrend. A high is made by the price and as the market drops, a second high is made that is lower than the initial high. We connect the 2 highs to draw a trendline. Once price closes above the trendline AND all the non-tbl indicators are bullish, we have a signal to go long. All of that happens in the same candle. Image 12 13
A bullish trendline followed by a signal to go long: Image 13 Another example of a bullish trendline followed by a signal to go long: Image 14 14
Bearish Trendline A Bearish Trendline is one that appears under the price in an upward market. The trendline itself will also be sloped upwards. Once we establish an ideal looking trendline, a close below the trendline will signal a trade to go short. To draw a trendline, we want at least 2 points of reference. We want a low followed by a higher low. We will connect the two lows and extrapolate the trendline ahead of the price. In the example, the TBL is green showing an uptrend. A low is made by the price and as the market rises, a second low is made that is higher than the initial low, followed by a third. We connect the 3 lows to draw a trendline. Price does close below the trendline, BUT not all of the non-tbl indicators are bearish yet. Once all of the non-tbl indicators turn bearish, we can take the trade short. Image 15 15
Bearish trendline on a real chart: Image 16 Another bearish trendline on a real chart: Image 17 16
Patterns There are 2 main chart patterns that we will look at when considering taking a counter trend trade. These can also be lumped in to the support and resistance and trendline category, but if you can see the pattern they make, you will have a higher probability of a successful trade. The patters are: 1. Double Top / Double Bottom 2. Wedge Image 18 Image 19 17
Bearish Patterns Double Top With a Double Top, price finds a high, or a level of resistance, and after it's rejected from there, it comes back to test it again. A second rejection from that level will often send price on a larger downward ride. This is very similar to a trade off of resistance, but a Double Top is generally considered to have highs that are closer together without any market wobble between the highs. Image 20 18
In this example, a high is made and the second high doesn't quite reach the level of the first. as long as the attempt was there and it looks like it tried, it will still count. Image 21 In this example, a high is made and it's followed by a second high that could not close above it. Attempts were made, but the market only formed wicks. Image 22 19
Bearish Wedge This is my favorite reversal pattern. It happens almost every time a decent reversal is about to happen, I watch for it with eagle eyes! In a bearish reversal Wedge, price must be trending higher. At the top of the trend, the last couple of highs are very shallow, almost a kind of topping out. The first high is followed by a slightly higher high. The lows however are not as shallow, they keep rising more dramatically than the highs. Image 23 20
Bearish Wedge formation of a real chart: Image 24 Bearish Wedge formation on a real chart: Image 25 21
Bullish Patterns Double Bottom With a Double Bottom, price finds a low, or a level of support, and after it's rejected from there, it comes back to test it again. A second rejection from that level will often send price on a larger upward ride. This is very similar to a trade off of support, but a Double Bottom is generally considered to have lows that are closer together without any market wobble between the lows. Image 26 22
Double Bottom after a larger move: Double Bottom just after the market open. Image 27 Image 28 23
Bullish Wedge In a Bullish Wedge, price must be trending lower. At the bottom of the trend, the last couple of lows are very shallow, almost a kind of bottoming out. The first low is followed by a slightly lower low. The highs however are not as shallow, they keep falling more dramatically than the lows. Image 29 24
Bullish Wedge formation: Image 30 Bullish Wedge signals along trade when TBL turns green. The trend isn't really intact until we get a pullback, so this can count as a counter trend trade Image 31 25
Regular Divergence For this we are going to introduce an indicator called the MACD. What we will be looking at is its ability to form highs and lows along with the price. This is a type of oscillating indicator as it goes up and down in its own window. The traditional MACD is a two part indicator, but we are going to only use the histogram. Image 32 The MACD is a great tool to help us get an idea of market momentum. It can really tell when the market is getting weak and can no longer continue to move in its trending direction. Regular Bearish Divergence is when price is making higher highs, but he highs on the MACD re getting lower. This indicates a weakness in the market. Regular Bullish Divergence is when the price is making lower lows, but the MACD is making a higher corresponding low. 26
Regular Bearish Divergence As the price makes a high, the MACD will make a corresponding high. for the most part, the MACD will do what the price does. the market makes higher highs, the MACD will do the same. However, once in a while, when the market is likely to change, we will see the MACD does the opposite of what the market does. In the case of Regular Bearish Divergence, as the price makes a higher high, the MACD will make a lower corresponding high. This shows weakness in the market's ability to keep climbing. Once we get a bearish divergence setup, we can take the short signal as it happens. Image 33 27
Regular Bearish Divergence: Image 34 Regular Bearish Divergence: Image 35 28
Regular Bullish Divergence As the price makes a low, the MACD will make a corresponding low. For the most part, the MACD will do what the price does. The market makes lower lows, the MACD will do the same. However, once in a while, when the market is likely to change, we will see the MACD does the opposite of what the market does. In the case of Regular Bullish Divergence, as the price makes a lower low, the MACD will make a higher corresponding low. This shows weakness in the market's ability to keep dropping. Once we get a bullish divergence setup, we can take the long signal as it happens. Image 36 29
Bullish Divergence: Image 37 More bullish Divergence: Image 38 30
Conclusion Trading against the prevailing trend can be tricky, but if you have a good reason to do it, then you can make money trading counter trend with less risk. The market moves in 2 directions, there is no reason why we can't get our fair share of both directions. In this manual, you have seen 4 different strategies to make trading against the trend viable. I always ask myself, why is this a good trade to take, and if you can answer that question with any of the methods in this manual, you have your answer. Enjoy trading against the trend!. 31