Understanding Countertrend Trading Systems
For many traders, the quest to find a profitable countertrend trading system is all consuming. Countertrend systems appear desirable because their goal is to buy low and sell high. These systems try to identify inflection points, or the moments when stocks change direction, so traders can take positions close to when they occur.
This approach may work in a few narrowly defined situations, such as in a trading range or a trend channel, but it’s likely to fail in a spectacular and expensive way if attempted on a broader scale.
The vast majority of trading systems follow market trends. This is simply a higher‐probability practice. Trend‐following systems tend to outperform countertrend systems, especially for position traders. Swing traders and some day traders sometimes use a countertrend approach, but even then, they usually do so in conjunction with a trend‐following component.
Countertrend systems usually depend on oscillating indicators, reversal patterns, and channeling strategies to find turning points. Some countertrend systems also are based on cycle theory, and others are based on volatility, expansion, and contraction.
Don’t spend too much time evaluating countertrend systems, at least until you’re confident in your ability to use trend‐following systems to successfully make your trades. Countertrend systems generate a large volume of trades, and the more you trade, the more you spend on transaction and slippage costs. These costs alone often swamp potentially profitable systems.
Although a countertrend strategy can sometimes work profitably in a trading range or trend channel, it’s still risky, especially for a new trader. Until you can confidently (and honestly) consider yourself a thoroughly experienced trader, stick with the proven techniques that are more likely to lead to profitable results over the long term.