Author
trade24
All articles (70)

Traditionally, most traders use trend-trading. It means if uptrend is strong, you buy an assent without selling it. But it’s just traditional… In this article, I want to tell you about another-way strategy – trading against the trend. You’ll get know how to gain from downtrends buying, and from uptrends selling.

1.Doing Like Everybody or Being Unique!
2.Change or Correction?
3.How to Use This Option Strategy?
4.Signs of a Trend Change!
5.How to Detect a Correction?
6.Afterword

 

So, as I’ve already mentioned, most traders use trend-trading and think that any bet against the trend will be failed. But I must say, lots of traders lose their money at the exchange, so it’s not recommended and even forbidden to trust crowds. Probably, novices suffer losses because they’re convinced in trend-trading might. They will surely lose when trends turn or corrections appear.

Be logical and consider: if a trend is estimated only at the middle or end of the order, how can one earn much with trend-trading? It often occurs that a trader estimates a new trend, placing a bet, but market turns backwards at once. Everything this trader can gain are 1-3 profitable orders; and then he loses it when trend turns. If you can detect trend change, you’re likely to earn as much as possible, because of detecting the change before it really appears. In other words, if there is the uptrend, but you know it will change in some time. Thus, you can make a couple of failure-bets, and then cover these losses with 5-10 profitable orders.

There are two ways of using “Against The Trend” option strategy: look for and forecast the change, or trade with corrections of the current trend. I find the first more profitable, but it’s tougher to detect the change than to guess about a correction moment. Though, some traders work with either tools.

Algorithm is quite simple, but there can be many tools. For a good forecast of a change or correction, you may need indicators, figures or even economical news. 2 stepsoftrading:

1. Estimate the time of a change. It can be accomplished with different tools, but they should be used together for a more accurate forecast. The key moment of this option strategy is the detecting the time of that very change. Its signs will be described further.
2. Buy an option. Use middle- and long-term options, because they’re the most profitable for trading against the trend. Recommended timeframes: from half-hour to one day.

There are lots of ways of trend changes detection. They should be combined as give many false signals. So, hereare 3 mainsignsofchanges:

1. Every trend can have its line, estimating price borders. For an uptrend such a line is built at minimums, for an downtrend – at maximums. When a trend line is broken by a price, it’s the first sign it will change soon, but you mustn’t rely only on that sign. Price can leave these borders, and it a trend line is broken, use other tools and look for entrance points. And if there are no such points, don’t make any orders.

Note: when a price breaks a trend line, but there is no change, rebuild the line according to current market state (change the angle of scope).

2. Another sign of an upcoming change is the divergence of an indicator. Let’s look into it with the picture of MACD above. If the chart creates a new maximum, but an indicator doesn’t, this is called divergence – the trend is done. Divergence can be seen in the picture above – after that, the trend changes. MACD is not the only indicator suiting such an analysis – you can find more tools in your terminal or on the net.
3. The last sign you can use is the intersection of moving averages. A moving average is also an indicator, having different periods. Actually, a moving average value is the average price of some previous candlesticks opening or closing. The quantity of previous candlesticks is estimates the period of the indicator. If you have two of them of 24 and 100, they will intersect. The point of such an intersection if the point of entrance. Surely, they must be used along with other tools, because moving averages can frequently intersect due to long corrections.

These three signs can become a good options strategy for you. Firstly, you wait for the moment when a price breaks the trend line, check for the divergence, and if it is there, wait until moving averages intersect and then enter the market with a new trend.

It’s a lot easier to predict corrections than to forecast changes. You only need to build a trend line, but not the traditional way. For a downtrend – built the line at minimums, for an uptrend – at maximums. And when the price reaches the line, enter the market against the trend and wait for the correction. It’s recommended to use short-term options for that, because fallbacks usually are not so long.

I would like to add that this option strategy will let you gain more than a standard trend-trading, but will require more efforts. Nevertheless, if you plan to be a successful trader, you’d betted spend some time for drilling this option strategy, use it at a demo-account and if it’s profitable, start working with it at the real exchange.