Incorporating Pattern and Countertrend Indicators
Among the oldest adages in all of trading is that "" the pattern is your buddy."" As the trend specifies the prevailing direction of price activity for a provided tradable safety, as long as it continues, more cash can be made by choosing the current trend than by battling versus it. It is instinctive to desire to acquire at the cheapest price and also to offer at the highest rate. The only way to do this in the financial markets is to attempt to "" purchase "the lower " and " offer the top, " which by definition is a countertrend method to trading. ( See also: 7 Tools of the Profession.)
Each trading day the struggle in between those trying to purchase or sell right into a well established pattern as well as those attempting to purchase near a low and offer near a high plays out. Both kinds of traders have really persuading disagreements regarding why their strategy is premium. Yet, remarkably, over time, among the most effective methods might simply entail combining these 2 relatively inconsonant techniques with each other. Usually, the basic solution is the best one.
A Combined Approach
Two actions assist to effectively incorporate trend-following as well as countertrend strategies:
- 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 locating an optimum strategy might take some time and also initiative, highlighting the potential usefulness of this concept can be done using some really straightforward techniques.
Step 1: Identify the Longer-Term Trend
In Figure 1 you see a stock graph with the 200-day moving average of shutting rates plotted. From a trend-following perspective we can simply mention that if the latest close is above the current 200-day moving standard, after that the pattern is "" up " as well as the other way around.