Trend Trading Or Counter Trend Trading - Which Is Best?
When I first starting designing and testing trading systems, back in the early days of personal computers and trading software, I immediately gravitated toward counter trend trading. I would put up a stochastic, before I even knew what it was measuring, and my eye went right to all the divergences. A divergence is a basic counter trend pattern, where the price makes a new high, for example, and the indicator makes a corresponding lower high, thus forming a divergence with the price. The idea is that the new price high was not confirmed by momentum, which in this case was losing strength. When this pattern is seen, it is thought the market might have put in a high for the move, and it might turn around and go in the other direction.
Timing The Exit Of A Trade After A Large Move
There are many examples of market blow-offs and subsequent crashes. It is a very difficult balancing act trying to decide whether to get out during the parabolic move, and possibly leaving huge gains on the table, or to hold on with the risk of overstaying the market and giving back much or all of the gains. There is no easy answer. However, many lessons can be learned from observing past large market moves and the inevitable crashes that followed. Gold in 1980 was a good case study, as was the Nasdaq blow-off in 2000. Many individual stocks make great studies as well, including many recently.
