Friday, May 23, 2008

Countertrend

Buy low, Sell high

Short high, Cover low

Trade with the trend after a consolidation

Trade countertrend after a momentum spike

These simple rules have made me a lot of money over the last 3 months, but the last rule can sting, if applied at the wrong time. Actually it was a lesson I had to relearn the last 2 days

Take a look at this FTSE chart. I went long 6221 as 6220 seemed to hold on the 2min and the 10tick supported the trade.

Globetrader_65

The FTSE broke down and the trade cost me 250 GBP.

Next day Heating Oil making a new High, it seemed to stall and I took the short

Globetrader_64

I missed the 2 opportunities to cover at a profit and that trade cost me 1100$ overnight.

1600$ paid and yesterday I was mulling over what I did wrong, why these trades, which usually work failed. It could be that they were just losing trades but with 71 trades made so far this month, they were losing trade 2 and 3 within 1 day to another. There had to be something putting them apart from my regular trades. We had a holiday yesterday here in Bavaria, I took the day off and enjoyed the day. While taking a long walk with my dogs I let the trades play again in my mind and I finally found something which set them really apart from other trades I took these last few months. Both trades were made late in the day when the regular trading in the contract had already ended and it was actually after hours trading taking place.

Today I traded the HSI, a trade I will discuss in a separate article and the chart looked like a long to me at 10:00am my time. A bounce was due, but I remembered my lesson and the new rule I had postulated yesterday:

Never take a Countertrend trade after hours

Globetrader_66

Trade not taken, even if a Higher low printed above the -200 line, because HSI regular session closes at 10:00am.

And here you see what happened in the last 15 minutes.

Globetrader_67

HSI continued the move it made prior to the close of the regular session.

A lot of my trading is based on psychology and a countertrend trade works, because bigger traders, traders with a lot of money, who don't care if they need to scale into an opportunity, see a bargain price, when they look at a chart. But bigger traders don't look at the chart after hours. After hours is too thin for them, there is not enough volume to trade big. But that's what you need to do to turn a train around. So the playground is left for the trend traders, who continue the trend with less volume. You don't need to add a lot selling pressure to continue a slide, but you need a lot of buying to stop and reverse a train. There are enough opportunities to do that in the trading day, no need to do it when the exchange just closed. And this let to my new rule:

Never take a Countertrend trade after hours

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