There is a popular saying that is preached to most new traders: the trend is your friend. This means that if you are able to identifying a discernible pattern in the direction of price movement, stick with it.
This is because, to a certain degree of accuracy, you are able to place a trade that has a higher chance of ending up in the money. Then, there is another form of trading – trading against the trend. This is the exact opposite of following the trend.
Instead, traders choose to go in the opposite direction of a pattern that is emerging. Let’s take a closer look at trading against the trend and what you need to know about it:
It is a Risky Business
Perhaps the first thing that you should know about trading against the trend is that it is not for the faint of heart. This is because there is a larger amount of risk involved in this type of trading. When you decide to trade with the trend, you are afforded a certain amount of security.
Going against the trend, however, there aren’t the same luxuries. This is why it is best if only more seasoned traders partake in such a venture. If you are going to have a higher degree of precision with such trades, you will need to be well versed in reading the markets.
If not, there is a higher chance of you making a mistake, misreading the situation, and losing all of your money. In most instances, trading against the trend involves a lot of skill and at least a little bit of luck.
Don’t Make It a Habit
There are cowboy traders who swear by only going against the trend. Now, there may be individuals who have found a great deal of success by doing this but it is not often the case. Due to the higher risk involved, it is not advised to only trade against the trend.
However, this does not mean that you should not take full advantage of the opportunities that may present itself when a trend is about to reverse upon itself. Trading against the trend should be seen as an additional tool to be used when the market conditions look right. It should be done occasionally so that you are able to exert some flexibility on your trading style and make a profit in an unlikely situation.
There Should Always Be a Reason
Following up with the point made above, you should never bet against the trade simply for the sake of it. Instead, every time that you decide to do such a thing, there should be excellent reasoning behind it. Mainly you should be able to prove – with relative certainty – that the trend will be reversing soon.
This means that you cannot rely upon fundamental analysis alone for such a situation. Despite what the news may say or what events may be taking place, you will need to quantify your theories. You will need to consult the trading charts to see if your assumption can be supported. For instance, you can use the head and shoulders pattern as well as its inverse to see if such a situation may be upon you.
A situation that you should make a point of avoiding is going against the trend simply because the market appears to be oversold or overbought. Such market conditions are tricky and often aren’t good enough indicators by themselves. Therefore, they can easily result in false trading assumptions.
This what you need to know regarding trading against the trend. Why you should not avoid it completely, know that it should be undertaken only under very specific conditions.