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Trading with the Trend or Against the Trend

Trading with the Trend or Against the Trend

Richard Krivo, Trading Instructor

Instructor's Response:

While what you suggest could indeed happen, rather than trying to predict a top, the higher probability trade would be to wait for the retracement to occur and then take a long position back in the direction of the Daily trend that has been in place since early March. While pips can be made trading counter trend, they will come with a greater amount of risk.  The question often arises at to why there is greater risk trading against the trend.

To answer that, let's take a little more in depth look at this AUDUSD Weekly chart with an eye toward trading trends vs trading retracements...

We can see that beginning with the most recent bullish uptrend, three major upside moves (those noted in green) have taken place.  During that same time frame, six retracements (those noted in red) have occurred.  Just at a glance we can see the moves with the direction of the trend are much smoother and of a longer duration.  The moves against the trend, on the other hand, are much shorter and not at all smooth.

The total pips gained going with the trend during this time are approximately 2870 while those gained going against the trend are roughly 2025...a difference of 845 pips.  As mentioned earlier, no one ever said pips cannot be made in counter trend trading, just that they come with more risk associated with them.

So, the question before the trader is would they rather be in fewer trades that are of a longer duration and have smoother movment cycles with greater pip potential, or take the risks that are presented by taking a greater number of trades that are of shorter duration with ragged movement cycles and less pip potential?

chart 12 09 09

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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