Price Action Trading Rules Warn Against Counter Trend Trading

We are often asked why we take counter trend trades when our price action trading rules warn against counter trend trading. While this answer is fairly straight forward, we think it will help to better explain our thinking and why we warn against taking counter trend trades. There are actually a few occasions where a counter trend trade is a high probability trade entry, but most traders have no idea as to how to spot these high probability counter trend set ups. Instead, they take the worst counter trend set ups of the day, and they take them over and over and all they are doing is entering in the wrong direction at the exact location where most smart and profitable traders are actually joining the trend.

Why The Trend Is Your Friend
(nvest2success.blogspot.com)

For this reason, one of our most important price action trading rules for inexperienced or unprofitable traders is to NEVER take counter trend trades. Let’s say that again for good measure! Never take counter trend trades if you are an inexperienced day trader or if you are not consistently profitable in your day trading. By sticking to this one rule alone, you will probably save yourself a lot of money and improve your trading almost immediately. Rather than spend a lot of time explaining a good counter trend trade, because these set ups are so rare, it’s not worth the time or effort. It would simply be better for your overall trading results for now that you stick to the rule of never taking a counter trend trade until the trend change is proven using our price action trading rules.

By sticking to the trend, you will improve your overall results by reducing your number of losing trades. By trading only with the trend, you will likely improve your trading results considerably almost immediately. A healthy trend will normally have a trend line that is close to a forty five degree angle. Anything steeper will not last long before it reverses or flattens out more. Anything less than forty five degrees is weak and will reverse soon or else the angle will increase and become steady at an angle closer to forty five degrees. A healthy trend will undulate up and down as it steadily climbs higher. There will be pullbacks that will often look very bearish at first, but these are normally only short term corrections that are caused by profit taking and weak traders looking to catch tops. In most cases, if you try and catch one of these corrections, you will get trapped on the wrong side of the market and quickly see prices moving against you and with the trend again.

I am going to show you an excerpt from an article written by Lance Beggs and he talks about the importance of the trend and how he trades them. He also says that there are some counter trend trades that set up nicely, so he trades them as well. But my guess is that he’s a very experienced trader and most importantly, that he can read the price action well and is a profitable trader too. If this description of Lance does not describe you as a trader, then do not counter trend trade, because you will not be smart enough to beat the professionals at their own game. Here is what Lance wrote and posted at www.yourtradingcoach.com.

First, it’s important to recognize that if your premise is for the trend to continue to S/R then any counter-trend trades will be a much lower probability. It’s much better to stick to the with-trend opportunity.

If I understand your scenario correctly, you’re just talking about trading the pullback. You’re not expecting a reversal. So… stick to with-trend.

Al Brooks in “Reading Price Charts Bar by Bar” says: (by the way… this book is compulsory reading, in my opinion)

“Trends are always forming pullbacks that look like terrible entries but are profitable and reversals that look good but are losers. Most trend pullbacks follow just enough of a climax to make traders wonder if the trend has ended and trap traders out of entering on the pullback. Also the trend reversals are just good enough to attract and trap Countertrend traders. If you trade Countertrend, you are gambling, and although you will often win and have fun, the math is against you, and you will slowly but surely go broke. Countertrend setups in strong trends almost always fail and become great With Trend setups…”

I prefer to not rule out a counter-trend opportunity entirely, but will say that I largely agree with Al Brooks’ statement. The best opportunity is with-trend. Counter-trend is MUCH harder and you should think VERY carefully before considering counter-trend trades.

So you see, there are profitable traders that think it’s OK to take a counter trend trade, but they do so only when the likelihood of that trade being successful is stacked in their favor. The problem with that statement is that most traders can not determine when prices are stacked in their favor, so the strategy is a losing strategy for them. By staying with the trend and removing the ability to take counter trend trades, you automatically reduce the number of low probability trade opportunities and increase the high probability trade opportunities. It’s like a double boost to your trading results really.

Think about this for a moment: Assume that you are not very good at your the timing of your trade entries, but you are proficient at picking the overall trend direction, which is often relatively easy for even an inexperienced trader. Even if your timing is off, and you enter early or late, if you enter with the trend, it’s very likely that prices will be moving in your favor again sometime soon. However, if you are early or late with a counter trend trade, then it might be a long, long time before prices even begin to move in your favor, so that puts the odds strongly against you. Most all inexperienced or losing traders are early or late with their entries, so what do you think is going to happen to them the majority of the time when they counter trend trade?

Only an experienced chart reader or someone that is very proficient at reading the price action can consistently trade counter trend and do so successfully. I rarely take counter trend trades, but when I see the right set up, I’m all over it and this also often allows me to catch the highs and lows of a new trend. Occasionally even I get it wrong though and most of the losing trades I do have are because I took a chance on a counter trend trade and was wrong. Guess what I do when I get it wrong though? I exit quickly with a small loss. I don’t hold on hoping prices will come back while arguing with the trend, because doing so is fruitless and it will cost you dearly. How do I know this you might ask? From experience in my early days of not knowing any better and doing just that, hoping and praying that the strong trend I just bet against will suddenly turn in my favor. They rarely do though, so it’s not worth the risk! Our price action trading rules warn against counter trend trading for a reason, so stick to the rules and your trading account will be fatter because you chose to do so.