Types of Trading Systems: Counter-Trend Following

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Counter-Trend Systems As the name suggests, this is a system that seeks to make money by going against the current trend. The goal here is to buy low and sell-high.

Traders following a counter-trend system try and enter a position whent they spot momentum in one direction fading. The most common way to do this is using Oscillators. Oscillators are indicators used when the market or a stock isn’t showing a definite trend. It allows the trader to see whether the stock is over-bought or over-sold. The most commonly used oscillator is porbably the Relative

Strength Index It is calculcated using the following formula: RSI = 100 – 100/(1 + RS*) Where RS is Average Gain over x Days/Average Loss of x days Usually, the time period of x days is taken to be 14. An RSI value of over 70 is said to indicate overbought levels, whereas a value of below 30 is taken to indicate oversold levels This graph taken from stockcharts.com is an example of how RSI is used rsi-over-oversold Other Methods: Not every counter-trend system needs to use oscillators. Like the famous ‘Double-7’s’ strategy . This strategy suggest buying on the following three rules: Price is above its 200-day moving average If price closes at a 7-day low, then buy. If price closes at a 7-day high, then sell the position. The following graph illustrates the use of the Double 7 Trading system Double & Strategy Drawback The major problem with counter-trend system is the lack of a down-side. Thus, losses could in theory be unlimited, and unlike trend-following systems, there is no definite point to place your stop loss

This article is a part five of a series in which we answer a set of questions about Trading Systems, namely

  1. What is a trading strategy and why you need one.
  2. How to lay the groundwork for a trading strategy.
  3. Finalizing your Trading Strategy.
  4. Types of Trading Systems- Trend Following<./li>
  5. Types of Trading Systems- Counter-trend
  6. Let us now get into Counter-Trend Systems

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