Most Forex traders start out by trying to catch that dream trend that will produce 500 pips with just 10 pips of stop loss! So that they can prove themselves to be exceptional technical analyst in front of their peers. However, most profitable traders in the world understand that while it is possible to find a trade like that, it is simply not worth their time to hit the home run every time. Profitable Forex traders make their bread and butter by trading small trends, within a bigger trend, and often against the prevailing trend.
How to Trade Trends Within or Against the Trend
There are many ways to skin a cat and certainly the internet is filled with trading systems that try to do exactly that, catching small trends within a larger trend then going against it! Before we thrash out about how to get it done, let’s first identify what it means by trading within or against the trend.
Most people will tell you that it is a form of swing trading where a trader will try to enter positions against the prevailing trend to get some extra pips by trying to trade the retracements then reversing his position to trade with the trend. That is exactly right.
Let’s imagine any market situation, even not analyzing the market from different time frames; you can clearly see that often price goes enough against trends, that it appears the trend might be changing. But, alas! The next day, against your all positive expectation, price shoots in the direction of the original trend that you knew exists.
Because price is never going up or down straight (we wish!), and always ranging within a narrow upload or downward channel, we can identify those channels in order to successfully measure the “relative” top or bottom of a trend. Most trading platforms will offer some sort of tool to draw these channels. In technical analysis, we call them equidistant channels.
Before you go on your way to trade against the trend in order to capture few additional moves of the instrument you are trading, beware that this is one of the riskiest form of trading that you can ever follow. Nevertheless, once you have identified and drawn the equidistant price channel, by using Fibonacci channels, equidistant channels or Andrew’s pitchfork, don’t just blindly enter at the borders of that channel!
In reality, on an uptrend, the equidistant channel’s lower trend line that connects the lower low bars of the trend is the EXIT point. Similarly, on a downtrend, the trend line connecting the lower high of the trend is the EXIT point.
Expert traders will often utilize various technical analysis tools such as MACD divergence, overbought and oversold oscillators along with their line studies (the two trend lines which collectively draws the boundaries of the trend) to identify potential reversal points. Identifying reversal point is perhaps the most crucial part of trading trends, within the trend and against it.
Once you have successfully entered the trade, now use your trailing stop loss orders to follow the price to the lower (for uptrend) and upper (for downtrend) equidistant channel. Close your position when price reaches the trend line or tighten your stop loss in order to protect your profit. However, if you do not use trailing stop loss (it can be automatic, a 2 bar stop loss or ATR based), you run the risk to letting the trend turn back and hitting your stop loss.
This is a form of trading that can be highly profitable because of the small stop loss requirement but unless you are experienced enough, don’t try this with a live account. Because unless you have a mechanical system that has proven track record of identifying top, bottom or reversal points of a trend, you will simply end up getting your stops taken out. Try this at home, try again and probably with some practice you will be able to master the technique of trading within the trends and against it!