Trend Trading vs. Counter-Trend Trading

If you analyze the trades of an average chart pattern trader, you will find a large part of them to be against the direction of the trend prevailing at that time. Indeed, it seems that several of the popular chart patterns (channels, double/triple tops and bottoms, and head-and-shoulders) are based on a trend reversal, which is counter-trend by definition. Of course, not all chart patterns are counter-trend — triangles and flags & pennants provide confirmations to the current trend rather than seeking its reversal. Nevertheless, two valid questions arise — is it worth trying to catch reversals? Is jumping on the trend bandwagon a good idea?

Trend trading offers its own advantages. Without looking deeper, trading with the trend seems like the only sane approach. After all, who would be buying a currency pair knowing that it is going down, or selling when it is going up? Seeing an asset rising in value gives a clear buy signal for a trend trader. The probability of failure is low as the currency pair is riding the momentum. At the same time, going with the trend usually lacks any clear stop-loss or take-profit opportunities. It is difficult to make sure that you are entering a trade with a decent risk-to-reward ratio.

Counter-trend trading appears counter-intuitive at first glance, but it has its own benefits. Counter-trend traders do not intend do trade against the trend, they are trying to enter at or near its reversal. In doing so, they attempt to get a very close stop-loss level (the peak or bottom of the reversal) with a profit target plainly defined by a relevant high and low levels of the previous trend. In most cases, "counter-trenders" exchange the probability of success (at least partial) for the clarity of exit levels combined with a favorable risk-to-reward ratio.

Obviously, there is little reason (except psychological ones) to attach oneself to only one of these approaches. Even if you favor counter-trend trades, you can still enjoy trading with the trend when you see a well-defined level for a stop-loss order.

If you have any additional details or insights on how you react to trends in Forex trading, please feel free to join a discussion on our forum.