Whenever currency pairs begin strong trending moves, traders will ask about the merits of the trading adages “trade in the direction of the trend” or “the trend is your friend”. What does the trend have to offer? Why not trade against the trend as well as with the trend and make pips going both ways?
While pips can be made trading counter trend, they will definitely come with a greater amount of risk. Essentially, when taking trades in the direction of the trend, the trader has the momentum, the “push” of the market behind their trade. Since a trading objective is to lessen risk, one way we can do that is eliminate trades that are against the prevailing trend.
When trading countertrend there is less momentum pushing in that direction. As such, the dominant trend can kick back in at any time quickly negating some/all profits which may have been earned by trading against the trend.
Also, when a trader knows that they essentially have the “market behind their trade” when trading with the trend, they have more confidence to stick with the trade and let it mature as opposed to closing out the trade too early.
Lastly, countertrend entries need to be much more precise since you are trying to time an entry while it is moving in the opposite direction that the market has been taking the pair over time. Conversely, when you have the market behind your trade, entries with the trend can be much more forgiving.
Let’s take a more in depth look at this concept using a historical Daily chart of the USDCHF as our example…
The approximate number of pips in each move to the downside, in the direction of the trend, is shown in green. The approximate number of pips in each move to the upside, against the trend, is shown in red.
While we can definitely see that pips can be made trading counter trend, 4,070 pips in this example, there is a very significant difference in the number of pips earned by the trader who only took trades in the direction of the trend.
Based on this chart, trading with the trend in this example would have accumulated 3,685 more pips, roughly 47% more and with less risk, than a trader who only took counter trend trades.
---Written by Richard Krivo
To contact Richard, please email firstname.lastname@example.org . You can follow Richard on Twitter@RKrivoFX.
To be added to Richard’s distribution list, please send an email with the subject line “Notification”, to email@example.com .
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.