There are many Forex strategies based on a specific indicator. Countertrend strategy is one of them. In fact, this strategy is a logical continuation of TDI strategy. Although Countertrend strategy is more complex, it is considered that it may bring higher profit.
In order to fully understand and evaluate this strategy, it is necessary to review TDI indicator and a trading strategy where this indicator is applied. As soon as we accomplish both these tasks, we can proceed to review countertrend strategy. So, let’s start:
A trader, who use TDI counter-trend strategy opens both sell and buy positions simultaneously in order to increase profit. Before a trader determines entry points, he/she needs to change settings of the indicator adding two additional levels. The new levels will have a value of 25 and 75. These levels will be a little further from the overbought and oversold zones in the «body» of the indicator, ensuring that the signals will be clear and confirmed.
The signal is formed when the yellow moving average is above the level 75 or below 25. It happens when the price has moved in one direction for a long time or in case of the strong impetus, which directed price movement into this area. As a rule, both of these cases will be followed by the pullback of the price and a trader just needs to catch this moment.
A trader can open a position when the green and red lines cross the yellow line. Let’s see the example on the chart. We see that the yellow line is above the level 75 and the price is not rising any more, which means that the pullback has started. Once the dotted lines have moved under the yellow moving average, we open a sell position.
Protective order will be placed on the last fractal in the opposite direction from the transaction and stop-loss is transferred with the new fractals. Take profit orders are not placed, as there is simply no need for it. The trade is closed upon activation of the stop-loss order at the time of the trend reversal.
Entry in the opposite direction
It may seem that it makes no sense to open a position in the opposite direction, but a trader may think that as long as the global trend is still ascending, the decline, which has been used for opening a sell position, is only a temporary pullback after a strong impetus.
A trader can do the following: as soon as a sell position has been opened, a pending buy order is placed at the same level as the stop-loss, that is on the last fractal. Next, we track a pullback and move this order along with the new fractals.
It means that stop-loss level of the previous sell position will fully coincide with the pending buy order. The difference will be seen only at the moment when the price goes to the oversold zone, protective order will move to the shortest distance and the pending order will remain on the fractal.
As soon as the pullback completes and the trend begins to move upwards, a sell transaction will close with the profit and a buy position will open.
When the pending order has been activated, we place stop-loss order on the last sell fractal and can forget about this indicator. After this we focus attention only on the moving average of the indicator and money management for placing take-profit order.
Depending on the market situation a trader may move or not the protective order; however the best way is to use trailing stop. That is, if stop-loss level is at a distance of 30 points from the price level, trailing stop shall be placed at the same level. As soon as the price goes beyond this level, our transaction will automatically go to the breakeven zone.