Counter- to move against
Trend- the latest direction in which something is moving
Trade- to exchange
If you put all of these terms together, a counter-trend trade is an exchange that goes against the direction.
Let's take into account EURCAD. On the daily timeframe, the price in April was bearish. You can see the visual evidence based on the daily lower lows and lower highs that formed.
On May 10, 2022, the buyers pushed the price up past the last lower high at 1.37599, representing the previous highest exchange rate price sellers sold, causing the price to decline again to new lows at 1.33903.
This signals a reversal in price. Here is the true question:
Would it be wise to become the buyer, and what would that look like?
It is wise, but you'd have to understand which market cycle you'd be trading in.
There are three market cycles.
1. Trend continuation (a.k.a impulse)
2. Retracement (a.k.a the correction or counter-trend or pullback)
3. Reversal
When the price passed 1.37599 to make new highs at 1.37695, that signaled a reversal. It would have been wise to wait for a pullback before buying back up to ensure a better risk to reward. If this trade were taken above 1.33903 back up to the new highs, you would have had a decent risk to reward.
But, what about now. Could the same results be produced? Let's go deeper.
Does this qualify as a counter-trend trade?
If you scale up to the higher timeframe, you will see the weekly timeframe is in a downtrend. It is making lower lows and lower highs. So any buy you enter on the lower timeframe at this point will be categorized as a counter-trend trade.
Here is what this means:
1. Do not expect to hold counter-trend trades as long as you would a trend trade. Choosing which timeframes you enter counter-trend trades will help determine where you take profits, and your rules should play a big part in this.
2. Sometimes, you won't know if you're entering a counter-trend trade unless you become aware of which cycle you are trading.
If it's not clear, try going up one timeframe.
As far as this potential trade here goes, this would be considered a daily timeframe counter-trend trade because the weekly is in a strong downtrend.
Something to remember:
The best traders go with the trend. They may counter-trend trade occasionally, but their systems work best when they trend trade.
When choosing if you are the counter-trend trader, make sure your timeframes align, and you have sufficient visual evidence you are trading with the trend before entering a counter-trend trade.
Also, consider lowering your risk so you do not give back profits you may have just earned.
Lastly, consider if counter-trend trading may not be your thing. It's ok if it's not. Not all great traders trade the same. It's ok to be in your lane.
I pray this quick analysis and note were helpful. I'd love to converse with you if you have any questions or thoughts. So comment below, and let's chat there.
-Shaquan