Even though we’re advised to trade in the direction of the dominant trend, there are some occasions when trading oppositely would turn out to be a winner. Although the risk of being trapped in the wrong trade could be elevated, a proper analysis of the price action context will help us assess whether a change in the order flow is about to occur. If you want to know when it’s best to counter-trend, here are three of the top scenarios.
#1 Trend exhaustion
More than once we’ve seen the market overextending a particular move, beyond what most of the experts expected. In this case, sticking to just looking at support/resistance levels won’t be enough and we should take into account either the price action or what technical indicators like RSI or Stochastic (used on higher time frames) will show us.
An exhaustion pattern is generally a series of candles that suggest the momentum is weakening. Most of the time, we can easily notice how the size of each candle gets gradually smaller until the price moves the other way around. Secondly, exhaustion could be signaled by a large candle occurring at the end of an impulsive move. These are two best ways to spot exhaustions and keep risk under control, in case you want to open a trade.
#2 Critical support/resistance levels
Institutional traders pay attention to support/resistance levels simply because there are times when the price reacts around them. In this case, the risk of a false break occurring is elevated, but we can trade false break setups. Especially when the price gets to an S/R after an impulsive move, one should expect to see a reversion to the mean at some point.
Other variables should be considered since the price could move impulsively in either direction if there is a strong reason to do so.
#3 News trading
We already know that 2020 will be a challenging year for commodities, forex, stocks, or indices CFDs, mainly because a new economic downturn will occur. During this period, the market will be highly sensitive to news and violent price reactions will become the norm. Any unexpected news can turn the price action against the dominant direction, which could result in good counter-trend trading opportunities. It is important, though, to have fast and reliable access to the latest news as well as the ability to understand their implications fast. At the same time, used in combination with a technical strategy, news trading is another way to find good opportunities.