Trend Types – Forex Academy

On their path to learning how to trade in the forex market, some traders may need time distinguishing between trend trading and reversal trading. Aside from these two, traders have become aware of counter-trends, which is yet another concept shared and discussed in the forex community. Although even its name contains the word trend, traders across the world express their concerns not wanting to face the reversals scenario. As a counter-trend always moves against the prevailing trend, the majority believes that the odds of it winning that trade are low. Today we are finally helping you to understand what a counter-trend is and how it can impact a trader’s account.

Traders normally take a look at any currency pair and compare the price on the left end of the chart to the price at this very moment, which helps them conclude whether they are in an uptrend (the price is now higher) or a downtrend (the price is now lower). However, determining whether you are looking at a counter-trend may be a tougher job than it seems at first. If we take into consideration the time frame we are using and how zoomed in or zoomed out we are, we can question whether a precise definition of a counter-trend exists.

If you compare the two images below, you will see the two images of AUD/CAD daily charts taken at the same moment. Based on what we see below, depending on how you look at the chart, any trade you are in can be both a trend and a counter-trend trade. If you observe any YouTube trading videos, you may discover that despite the analysis indicating a downtrend, that particular trade can be perceived completely differently once zoomed out. Therefore, how we decide to look at our charts will inevitably affect the direction a currency pair takes.

Another important factor that traders may sometimes overlook is the involvement of big banks, whose impact on prices is what essentially pushes them up or down. While traders care about whether a pair is trending or not, big banks share no such affection. What they are interested in actually is where the majority of retail traders’ money is headed. By knowing where all the money is going, big banks can move the price in the opposite direction, which is why looking at where the prices were two years ago seems irrelevant.

Traders’ fears about trading properly, i.e. trading with the trend rather than against it, are therefore only a matter of perception. From the big banks’ perspective, and as a matter of fact, counter trading has no role in price movement. What is more, from the viewpoint of a trader, trend and counter-trend can turn out to be the very same thing, further reducing the value of this concept. Based on these facts, why should we then even concern ourselves with counter-trends and their impact?

Since trend traders’ only goal is to discover when a new trend or a continuation of an old trend is about to take place, their main task is to get involved on time and stay in the game for as long as possible. Other pieces of information, such as where a trend is, fall short in terms of importance as long as any such trend is happening. What traders should definitely work on is developing a system which can firstly recognize these trends and get them in a trade under the best possible circumstances.

Naturally, understanding the difference between trends and reversals will further help traders see what is of vital importance for growing a forex trading account. The question of how we can know whether we are not trading reversals any longer is key here as well. Unfortunately, the answer to this is that we will never know in advance. What we will be able to do is make reasonable conclusions with the wisdom of hindsight. If you are entering a trade, at which point will that happen? What every trader is hoping is that the entry happened as early as possible, but we cannot know exactly. Nonetheless, the algorithm you worked to develop, including the indicators you chose and tested, will carry out the task of neither getting us too early in a trade, which is considered as reversal territory.

Moving Average Convergence/Divergence indicator (MACD), which is essentially a two-line indicator, gives out a classic reversal signal when both lines under the zero line cross upward. As reversal trading cannot possibly lead to prosperity long-term, you are better off ignoring signals such as this one. Moreover, if you wait just a little longer, you will be able to see the two lines cross the zero line which is precisely an indication that you have left the reversal territory. Therefore, although we do not have a precise definition of what a counter trade stands for, this example alone should serve as clear guidance on what traders should focus from now on.

Should we then enter a trade the moment we see that things are turning? The answer is no simply because we need to see whether it truly is a reversal or not. Only when an indicator tests whether a reversal was a false one and the price keeps moving in the same direction, will you receive the actual signal to go long or short. Therefore, we cannot truly know when a trend officially started until we reflect on what happened before, which is why we need indicators to show us the way.

As a conclusion, the question of whether you should focus on trends or counter-trends is not really important, unlike the distinction between trends and reversals. What you need to avoid difficulties of trading reversals is a good set of indicators that will get you in a trade right when a trend is happening, be it a continuation of an old trend or an entirely new one. You should, therefore, only worry about entering a trade at the best possible time and having a system that can provide that. All in all, whether you are following a trend completely or moving slightly against it, do not fear to put full risk on that trend as long as your system tells you to go forward.

Introduction

There are millions of strategies out there in the market. Some work exceptionally well, while some fail miserably. Trading successfully is not about knowing several strategies, but about one strategy that works consistently. All professional traders are never in the hunt for trying out different strategies. They have expertise in a single strategy and know when to apply it and when not to.

Here, in this article, we shall be walking you through a simple yet extremely strategy that both day and positional traders can apply. Besides, we will enlighten you on the dos and don’ts of the strategy.

Understanding a Trend

The most evident state of the market is a trend. It is indeed the best state to trade as one can easily bet on the market’s direction. In technical terms, the trend is the state of the market, where the price makes higher-highs/higher-lows or lower-lows/lower-highs.

A trend alone can be of different types – based on the pattern. The above image of a trend is how an ideal trend looks like. However, the number of occurrences of this type of trend is very less. Apart from the ideal trending market, we can have other types of the same state.

Figure 1: In this type, the market breaks about the Support and Resistance (purple line), retraces through the line, and then makes another higher high.

Figure 2: Here, the market makes a HH by breaking about the S&R (purple line), pulls back insignificantly, away from the S&R, and makes a higher high.

Figure 3: The market made HH passing through the S&R, retraced a little, tried to make a higher high, and failed. Later, it retraced more than the previous time, and then successfully made a HH.

What is the ‘Higher High Failure’ Countertrend Strategy?

The “Higher High Failure” countertrend strategy is based on the third figure of the above image. It is named countertrend because the overall trend of the market is up, but the strategy is to take a short position.

According to the strategy, in an uptrend, if the market fails to make a higher high on the very first attempt, then one can prepare to go short on the security.

Logic

In a sequence of higher highs and higher lows, if the market fails to break above the recent HH, it is an indication that the trend is preparing for another push down before heading up. The failure also indicates that the buyers are not strong enough to push the market higher with one retracement. Since the buyers are slowing down, one can swing down from the seller before the market resumes its trend. Note that the length of this south wing depends on the strength difference of the buyers are sellers.

Trading the Higher High Failure Strategy

Consider the below chart of Euro / US Dollar on the 1H time frame. We can see that the market is in an uptrend making higher highs and higher lows.

The most recent higher high made by the market was 1.11834. The market then retraced to 1.1098, tried to make a new high from the previous one, but failed by leaving a wick on the top.

The failure to make a higher high indicates that the buyers are losing momentum, and as a result, the sellers could temporarily take over the market. In addition, the wick on the top at the resistance area signifies the strength of the sellers. Thus, right after the price shoots down at holds below the S&R (grey ray), one can go short on the pair.

Take Profit Placement

Since the buyers shot up from 1.10988 the previous, we can expect a reaction from the same level. Hence, 1.10988 would be the safest level to place the take profit level. If the sellers are strong in momentum, one can ride down until the S&R.

Stop Loss Placement

Stop-loss few pips above the wick can keep you away from getting stopped out. But it is risky to keep the stop loss right above the resistance level.

On the flip side, this strategy will work like a charm on a downtrend as well. For a downtrend, the strategy could be termed as a “Lower Low Failure” countertrend strategy. Let’s take an example of the same and understand how to trade a down-trending market.

In the below chart of GBP/CAD, we can see that the market is in a downtrend, making lower lows and lower highs. Level 1.70006 was the most recent LL. The market retraced to the S&R and tried to make a new LL but failed. During the failure to make a LL, a spinning top candle appeared, which was then followed by a bullish candle to close above the LL level. This confirms that the sellers are have temporarily faded out, and the buyers are going take over the market.

Take Profit Placement

Take profit can be placed at the price where the market tried to make a lower low previously. In this example, the TP would be at the S&R.

Stop Loss Placement

The safest stop loss for this strategy would be right below the price where it failed to make a LL.

Important Points to Note

The price should attempt to make a higher high and fail. The strategy cannot be considered for an equal high.
After the failure to make HH, the price should hold below the S&R level.
The strategy will not work if the price makes HH, holds, and then drops below the S&R.
Since it is countertrend trade, make sure to take profits at every hurdle.
The stop loss must be above the high of the higher high failure, NOT right at the resistance.

We hope you found the strategy interesting and useful. Do test it out in the live market and let us know the results in the comment section below. Cheers!