and countertrending markets by pointing out that elongated
candles extending up or down identify trending, or impulsive
price action, whereas shorter candles with smaller bodies
indicate countertrending price action, or reactive trading. This
is an important distinction for a trader because although our
indicators and overlays remain the same, our trading strategy
will differ slightly with the type of market we are in. A trending
market is one in which the directional bias is obvious and
can be seen on the chart by a pattern of highs, lows, and closes
moving in the same direction. Acountertrending market is one
in which there is no obvious direction other than sideways.
Trending markets call for making quick decisions upon entering
a trade but showing more patience once one is in the market,
whereas countertrending markets give the trader more
time in taking a trade but require less time in the trade and
speed in exiting. Trending markets by definition are impulsive
and move easily in one direction, whereas countertrend markets
are reactive by nature and exhibit indecisive price action.
We can define a trend trade as a position taken in the same
direction as the overall pattern of highs, lows, and closing
prices. Acountertrend trade is one in which the trader is going
against, or fading, the overall direction of the market in anticipation
of a correction or a reversal or a trade in which
the objective is to take advantage of a sideways market by
selling near the top of the current price range and buying near
the bottom.
Beginning traders often are attracted to countertrend trading
because of the perceived level of risk. To someone with a small
account, buying a market at a support level after a sharp price
drop and then placing a tight stop-loss order can seem like a better
choice than waiting for a market to correct or retrace and then
turn before entering the trade and then placing a stop-loss order
some distance away, below the last swing high. We believe a
indicate countertrending price action, or reactive trading. This
is an important distinction for a trader because although our
indicators and overlays remain the same, our trading strategy
will differ slightly with the type of market we are in. A trending
market is one in which the directional bias is obvious and
can be seen on the chart by a pattern of highs, lows, and closes
moving in the same direction. Acountertrending market is one
in which there is no obvious direction other than sideways.
Trending markets call for making quick decisions upon entering
a trade but showing more patience once one is in the market,
whereas countertrending markets give the trader more
time in taking a trade but require less time in the trade and
speed in exiting. Trending markets by definition are impulsive
and move easily in one direction, whereas countertrend markets
are reactive by nature and exhibit indecisive price action.
We can define a trend trade as a position taken in the same
direction as the overall pattern of highs, lows, and closing
prices. Acountertrend trade is one in which the trader is going
against, or fading, the overall direction of the market in anticipation
of a correction or a reversal or a trade in which
the objective is to take advantage of a sideways market by
selling near the top of the current price range and buying near
the bottom.
Beginning traders often are attracted to countertrend trading
because of the perceived level of risk. To someone with a small
account, buying a market at a support level after a sharp price
drop and then placing a tight stop-loss order can seem like a better
choice than waiting for a market to correct or retrace and then
turn before entering the trade and then placing a stop-loss order
some distance away, below the last swing high. We believe a
behavior on the higher time frames is mimicked by price
behavior on the lower time frames. If we are seeing pronounced
trending behavior on the daily chart, we can expect
trending behavior on the intraday charts. This does not mean
that the intraday movement will always be in the same direction
as the primary trend; it means that the candles will be
longer, which can seem counterintuitive to untrained traders.
Similarly, if the market is in a narrow sideways range over an
extended period on the daily chart, we would expect similar
reactive behavior on an intraday basis.
A very important difference between a trending market
and a countertrending market is that in a trending market
the higher time frames will dictate price movement and
direction, whereas in a countertrending environment the
lower time frame charts can dictate direction. This means
that in a trending market you do not want to go against the
trend on the next higher time frame. In a countertrending
market you are taking signals on the lower time frames
routinely regardless of the previous direction on the higher
time frames.
We titled this section “Trending and Countertrending Behavior”
instead of “Trending versus Countertrending Behavior”
because to be a complete trader, you must do both. The easiest
way to define whether you are in a trending or a countertrending
market is to define the trends on the different time
frames and see if they are in agreement, which would mean a
trending market, or are conflicting, which would mean a countertrending
market. We are going to teach you how to do that
in the next section.
Source: Mastering the Currency Market: Forex Strategies for High and Low Volatility Markets
