While many new traders will change their directional bias in an attempt to profit on this countertrend move, most experienced traders will sit tight and wait for the market to come to them before entering back in the direction of the trend. A good example can be seen on this 4-hour chart of the EUR/USD.
A bounce off of the low has resulted in the Slow Stochastics (14,3,3) moving back up towards the overbought level of 80. This indicator signals a sell as the Slow Stochastics crosses over after having traded above that 80 level. Since the EUR/USD trend is down, we only want to look for selling opportunities and this 4-hour chart shows a number of recent potential sells based on that Slow Stochastics crossover. It is important to wait for that crossover to be confirmed before entering and that can only happen at the close of the 4-hour candle. Traders would then sell at the open of the next candle and place their protective buy stop above this recent high. Profit target should be set at twice that risk for a 1:2 risk:reward ratio. This is key because even with the solid setups, traders should still expect to lose half of their trades. But if you win twice as much when you are right as you lose when you are wrong, you can be consistently profitable.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.