Do You Know When To Counter Trend Trade

Continuing in the series of increasing the probability of your counter-trend trades, this is going to cover another sign that the impulse move is running

into trouble.

Going back to the basics of a trending market, we have the impulse or

momentum move and we have the pullback in price.

Understanding this structure and the clues it gives you, can really improve

your trading results.

Virtually every chart you will look at looks something like this next graphic.

It's standard price structure in a trending market where, in a uptrend, the impulse moves are larger than the

pullbacks.

You can see a rhythm in price and nothing interesting is going on. I can hear people talking about buying the

pullbacks and although I will cover that issue in a future post, that's not as

simple as it appears.

In that graphic, there is nothing suggesting that counter-trend trading is the play to focus on. Believe it or not though, there are always those

people that will attempt to short any pause in the upward trending action.

Those people love to attempt to capture the top or bottom of the

market but end up adding to a losing position and taking larger than

necessary losses.

Eventually, all good things come to an end as the last buyers pile into the

move causing something different to occur in the price action and resulting

structure.

We have price "going parabolic" or perhaps forming a blow off top.

Regardless of what we call it, something interesting has occurred. We certainly have a change in state

compared to recent price action. This should have a trader paying attention

but is shorting a good idea?

If high probability trades are your interest, counter trend trades right now may not be the proper play.

Price has not shown anything that indicates a counter-trend trade should

be unleashed yet.

Often times what can happen after these moves is price simply

consolidates, works off the blow off, and then starts to work its way in the

direction of the trend.

The best play right now is no play. You probably would not want to trade the first pullback after this type of move

due to the extreme state of the market at this point. We need to see other

things occur.

Price had printed an interesting event to the upside and now, price prints an

interesting event in the pullback.

Compare the lengths of pullbacks and you can see that the second pullback is much more violent and larger than the

first one. This indicates much more selling pressure than this trend has

previously encountered.

Are the big players showing their hands? Would you be looking for a

long position at this point? Hopefully you said you would need to see more

evidence of upside potential but at this point, buying into this market is not a

solid play. How about shorting?

Let's look at what has occurred. There was an orderly uptrend of

price Price began to print a parabolic

move which should put you on alert An "out of character" pullback has

occurred

Tying that all together, now there is a bigger potential of at least another correction in price which you may

want to get involved in to the short side.

After such a large blow off in price PLUS the impulse move to the

downside, be on alert for another push to the downside as seen in this

picture.

Depending on your time frames, you may have to drop a time frame or two

lower to actually see this structure play out. Larger time frames can often

hide the details that you are able to capitalize on.

Does this indicate a trend change? The macro trend takes a lot to reverse so if you were to take counter trend trades from these moves, you may

want to keep your targets more on the conservative side.

Heading back to our stock chart of NDRM that I talked about here, did we

see this type of price action and structure occur?

The first correction was early in the morning after session open. It sets a

benchmark for pullbacks.

The following two pullbacks were unimpressive and although one came

close to the same size as the initial pullback, it was nothing to catch your

eye.

Although we don't have much of a parabolic move, the last bull candle was $1.35 from high to low which is bigger than most other price moves

per candle.

Price slams back, attempts a rally, and we have a gap in price. Price then

drops $7.57 which you can't see on this screen capture.

The point here is that there were clues in the price that alerted you to the possibility of a counter-trend trade.

The possible zone for entry was detailed in this article but you can see

the pullback after the gap down.

To wrap this up..price action and forming structure will most often alert you to the potential to go against the current trend. It may not be easy to

enter due to speed or liquidity issues, but it can also alert you to tighten up

the stops on longs or scale out of your position.

Jumping in front of momentum in either direction with a counter-trend

trade before you see patterns that can alert you to the softening of the trend is a quick way to drain your account.