One of the oldest adages in all of trading is that "the trend is your friend. As the trend defines the prevailing direction of price action for a given tradable security, as long as the trend persists, more money can be made by going with the current trend than by fighting against it. Nevertheless, it is a natural human instinct to want to buy at the lowest price and to sell at the highest price.

The only way to do this in the financial markets is to attempt to "buy the bottom" and "sell the top", which by definition is a countertrend approach to trading.

Check out some common technical indicators in 7 Tools Of The Trade. Each trading day the struggle between those attempting to buy or sell into an established trend and those attempting to buy near a low and sell near a high plays out.

Both types of traders have very convincing arguments as to why their approach is superior. Yet, interestingly, in the long run, one of the best approaches might just involve melding these two seemingly disparate methods together.

Often, the simple solution is the best one. A Combined Approach The key to successfully combining trend-following and countertrend techniques is twofold:. While finding an optimum approach may take some time and effort, highlighting the potential usefulness of this concept can be done using some very simple techniques. In Figure 1 you see a stock chart with the day moving average of closing prices plotted.

From a trend-following point of view we can simply state that if the latest close is above the current day moving average then the trend is "up" and vice versa. However, for our purposes here we are not looking for a trend-following method that will necessarily trigger actual buy and sell signals. We are simply trying to pin down the prevailing trend. Therefore, we will now add a second trend-following filter. In Figure 2 you can see that we have also added the day and day moving averages.

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If the day moving average is above the day moving average AND the latest close is above the day moving average, then we will designate the current trend as "up". If the day moving average is below the day moving average AND the latest close is below the day moving average, then we will designate the current trend as "down".

Learn how to calculate a metric that improves on simple variance. Check out Exploring The Exponentially Weighted Moving Average. Combining the Two Approaches: For our purposes, since we are looking for short-term pullbacks within an overall longer term trend, we will use something very simple and relatively short-term in nature. This indicator is simply referred to as the oscillator. The calculations are simple:. In Figure 3, we see the same price chart as in Figures 1 and 2 with the oscillator plotted below the price action.

As the underlying security dips in price, the oscillator drops below zero and vice versa. In Figure 4, see once again the same bar chart as in the previous three Figures. On this one we see the day, day and day moving averages plotted on the price chart with the oscillator displayed below.

Completion of this set of criteria suggests that a pullback within a longer-term uptrend may have been completed and that prices could be set to move higher.

The aforementioned criteria presents a scenario in which the trend suggests that the stock is due to continue its upward momentum, yet the investor will not be purchasing shares at the very peak of the cycle.

The Drawbacks There are many potential caveats associated with the method described in this piece. First and foremost is that no one should assume that the described method will generate consistent trading profits.

It is not presented as a trading system, only as an example of a potential trading signal generation method. The method itself is simply an example of just one way to combine trend-following and countertrend indicators into one model. And while the concept is entirely sound, a responsible trader would need to test out any method before using it in the marketplace and risking actual money.

In addition, there are other extremely important considerations to take into account that go well beyond just generating entry signals. The Bottom Line This is just a sampling of considerations that a trader must take into account before beginning to trade any particular method.

Nevertheless, with those caveats firmly in mind, there does appear to be some merit in the idea of combining trend-following and countertrend methods in an effort to buy at the most favorable times while still adhering to the major trend in play. The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool. For further reading, see Simple Moving Averages Make Trends Stand Out. Dictionary Term Of The Day.

A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Combining Trend-Following and Countertrend Indicators By Jay Kaeppel Share. A Combined Approach The key to successfully combining trend-following and countertrend techniques is twofold: Identify a method that does a reasonably good job of identifying the longer-term trend Identify a countertrend method that does a good job of highlighting pullbacks within the longer-term trend While finding an optimum approach may take some time and effort, highlighting the potential usefulness of this concept can be done using some very simple techniques.

Price with day moving average Source: ProfitSource However, for our purposes here we are not looking for a trend-following method that will necessarily trigger actual buy and sell signals. Price with day, day and day moving averages Source: ProfitSource So now our rules will be as follows: The calculations are simple: ProfitSource Combining the Two Approaches: Looking for oscillator reversals to the upside in an established uptrend Source: ProfitSource What an alert trader should be looking for is instances when: The day moving average is above the day moving average The latest close is above the day moving average Today's oscillator is above yesterday's oscillator AND; Yesterday's oscillator value was both negative and below the oscillator value two days ago.

Other relevant questions to ask and answer before employing any trading approach are: How will positions be sized? What percentage of one's capital will be risked? If and where to place a stop-loss order? When should you take a profit? The futures market is a lot less scary when these indicators are used to establish current trends. By learning a variety of indicators, you can determine the right time and the right strategy to trade any given currency pair. Learn to take advantage of both trend-following and oscillator techniques to analyze your trading decisions.

Technical analysis is basically an attempt to disprove the credo that "Past performance is not indicative of future results. These technical indicators help investors to visualize trends by smoothing out price movements.

Countertrend Trading

Although based on short-term trading, keeping the long-term picture in mind will help investors trade with the trend. Profit from countertrend trading strategies that are used to catch trend changes or to make additional profits from temporary Learn the most commonly selected periods used by traders and market analysts in creating moving averages to overlay as technical Learn about differences between trend trading and countertrend trading, and discover why some traders add countertrend trades Read about some of the different kinds of risks involved with trading strategies that rely heavily on countertrend trading, Learn more about oscillator indicators, technical momentum measures that are used by traders to predict potential market Learn what the ultimate oscillator is and find out about a common strategy traders use with the oscillator to signal entries An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.

A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

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