Sunday, November 18, 2012

Trend or Counter-Trend

Who makes the most money - the trader who follows the trend or the trader who anticipates a trend reversal ?

Trend Traders are always late in entering the market. A trend needs to start before a trader can enter. Part of the trend is always over before the trader can plan an entry. Moreover, there is risk of the trend becoming mature just after a trader has entered. After all, no one can say how much more steam may be left in the trend.

The counter trend trader anticipates a trend reversal and enters almost at the point of the perceived reversal. He may often sell at the top or buy at the very lows. This is the stuff traders dreams are made of.

Charles Darwin said "It's is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change"

The Trend Trader is most responsive to change. He buys after the trend is up, therefore responding to the new circumstances. He sells after the trend turns down, again following the market.

The counter trend trader is probably the most intelligent. He forecasts what the market is likely to do. But this style of trading is fraught with risk. What happens if the market refuses to follow him ?

If a trend trader finds he is on the wrong side of the market, he takes a loss, in fact, often a series of losses. If a counter trend trader finds that the market is not obeying him, he waits for the market to respond. This can result in large profits, but often in large unacceptable losses.

There are very few counter trend traders but a large number of profitable trend traders. Ask yourself, how does a counter trend trader make money. By getting into a trend before it starts. So, it does come down to catching the trend, doesn't it ? The trend trader is humble and modest. He says the market is wise and "I will try to follow what the market does".

Blessed are the Meek for they shall inherit the earth.

Today's Top ETFs...FREE LIST!


Rushabh Shastri said...

I have observed that one of the most effective trading style is "second opinion". We as a whole knowingly- unknowingly following "second opinion" style. Many so called dailly Tea time trader follow numbers of media and personal or news paper article which can help them to take decisions its one type of "Second Opinion".

Human by nature never wants to be dominated and if he is a trader-investor then the same traits heavyly works over individual. Trader/investor in most of cases feels offended if he finds that some one wants to be smarter than him in trading and his own style of trading is not as good as it should be.

By siting such an example I want to say that try to be "Perfect Trader" than "only Trader", and "perfect Trader" always seek for information and open to all information which can help him as a good "second opinion" . Never hesitate to claim that your better action was due to better "second opinion" and better "market confirmation". This claim will help you to better "second opinion" access and also an "unbiased"

Disclaimer- I personally a huge fan of "second opinion" and I give my trading ideas based on "second opinion" and "market confirmation". I follow the sequence of -----"second opinion"-"conviction"-"market confirmation"-"action"- "result"

Dinesh said...

Dear Sir,
An excellent post to differentiate between the two styles.
I agree following a trend is a lot less riskier than predicting a trend.