Trend Following vs Counter Trend

The debate between following the trend and trading against it (counter trend) has been a topic of discussion in the trading world. Often, following the trend is considered safer, and there’s a saying that “the trend is your friend.” While this statement holds some truth, the key lies in timing—entering at the right moment even when following the trend.

Understanding Trends

Typically, when prices move neatly during a trend, it can be due to factors such as: First, there may be hype causing retail investors to feel FOMO (Fear of Missing Out) that leads them to follow the trending hype. For example, when Elon Musk talks about Dogecoin, its price suddenly rises and continues to climb. Second, significant fundamental changes can drive prices in the long term. For instance, a company experiencing a significant increase in financial reports can cause its stock price to rise over the long term. In forex, when there is an interest rate change, and if the rates decrease, the currency’s price might drop. Or, war news can cause prices to trend dramatically. Third, institutions or big players may have their own interests because they have the power to move the market and structure the price movement so that the price can trend for an extended period.

Follow Trend:

Definition: Following the trend means aligning your trades with the prevailing market direction.

Advantages:

• Higher probability of success when the trend is strong.

• Profit potential by riding the trend.

Considerations:

• Need to identify the right entry points (pullbacks, breakouts, etc.).

• Risk management is crucial.

• Trends can change, so adaptability is essential.

Counter Trend:

Definition: Trading against the trend involves taking positions contrary to the prevailing market direction.

Advantages:

• Can capture short-term reversals.

• Useful during range-bound markets.

• Potential profit when the trend weakens.

Considerations:

• Requires precise timing.

• Riskier due to potential trend continuation.

• Not suitable for all market conditions.

Both trend following and counter-trend trading have their merits and drawbacks.

Imagine a scenario during the COVID-19 pandemic when masks and certain medications were in high demand. Opportunistic entrepreneurs took advantage of this trend by selling masks at exaggerated prices, effectively following the trend. However, if someone entered the mask business after the peak demand had passed, their business would likely suffer due to poor timing. Those who entered the market post-peak potentially faced significant losses. This concept is also applicable to the trading world, where timing is crucial. Entering a business at the right moment can lead to success in following a trend. Conversely, recognizing that a trend is weakening and deciding not to engage can prevent losses. Being able to detect a Trend Reversal is a valuable skill. In the world of trading, this skill is even more advantageous because traders can ‘short sell’ to profit from declining trends, turning potential losses into gains.

The advanced features of EA BeeTrade address these considerations. It knows when to follow the trend, when to counter it, when to lock in losses, and when to consider trend reversals or pullbacks. Exclusive members will learn how to utilize these features optimally while minimizing risk.