A trending market is one in which the directional bias is obvious and can be seen on the chart by a pattern of highs, lows, and closes moving in the same direction. A counter trending market is one in which there is no obvious direction other than sideways.
Trending markets call for making quick decisions upon entering a trade but showing more patience once one is in the market, whereas counter trending markets give the trader more time in taking a trade but require less time in the trade and speed in exiting. Trending markets by definition are impulsive and move easily in one direction, whereas counter trend markets are reactive by nature and exhibit indecisive price action.
Trending markets call for making quick decisions upon entering a trade but showing more patience once one is in the market, whereas counter trending markets give the trader more time in taking a trade but require less time in the trade and speed in exiting. Trending markets by definition are impulsive and move easily in one direction, whereas counter trend markets are reactive by nature and exhibit indecisive price action.
We can define a trend trade as a position taken in the same direction as the overall pattern of highs, lows, and closing prices. A counter trend trade is one in which the trader is going against, or fading, the overall direction of the market in anticipation of a correction or a reversal or a trade in which the objective is to take advantage of a sideways market by selling near the top of the current price range and buying near the bottom.
Beginning traders often are attracted to counter trend trading because of the perceived level of risk. To someone with a small account, buying a market at a support level after a sharp price drop and then placing a tight stop-loss order can seem like a better choice than waiting for a market to correct or retrace and then turn before entering the trade and then placing a stop-loss order some distance away, below the last swing high.
In the long run, trend traders will be rewarded more because they will be taking advantage of the market's tendency to trend. Counter trend trading strategies can be successful but require more diligence and create higher transaction costs because of the higher frequency of trading.
To enter any trade, whether in a trending or a counter trending environment, we generally prefer to use a signal generated by a leading indicator coupled with a short-term trend line break. In a counter trending environment, though, we can speed up our entry process by using the closing price beyond a doji or inside candles on existing support or resistance as the trigger. In counter trending markets we want to get in our position as close to the top or bottom of the range as we can.
In a trending environment, in contrast, we want the market to give us more of an indication that it is turning rather than just a pause in support or resistance. In a strong trending market it is best to pass on counter trending signals unless you have the time and skill to trade on a lower time frame.
