Feb 13, 2019

Forex Contra-trend Strategies

Forex Contra-trend Strategies

The trend sequence is just as prevalent in forex as in the stock market. However, no trend is even. Every trend is accompanied by corrections. As a result, strategies have developed that take this correction trade into account. Often referred to the correction trade as a counter trade, because it is almost against the existing trend. But basically, this is also a trend following trade, but only on a shorter-term basis.

What makes a contrast trend?
On the one hand, as already indicated above, a correction implies a contrast trend, ie a short-term trend within a long-term trend. But it can also be quite that you are looking for a turnaround and want to act a newly established trend. Although this is not a contrast end in the sense, the entry is still in the context of the existing trend in the opposite direction. So we have two types of possible contrast trends that we want to introduce.

Corrective trade as a counter trend
As usual, correction trading needs a large trend that could be identified using indicators or trend lines. In general, trend lines connect the lows and highs of a trend. A trend is confirmed as long as two lows or highs can be connected.

The chart above shows that the NZDUSD currency pair is strongly in a downtrend on a weekly basis. The two lows confirm this trend. However, the chart also shows that the trend is too strong, as the third low is formed much later. Nevertheless, and simplified, a correction could be traded to upper trend line within the context of counter trade.

But how do you do it? Because if you look closely, a fast-low has already been formed some time before. If you had already gotten in there, you would most likely have suffered a loss because the correction did not develop further. In order to avoid such false signals, an optimization by means of filter indicators, such as the RSI, is required.

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