Counter-trend trading: The most dangerous game

Counter trading a trend is always a risky endeavor. It is one of the easiest ways to lose money. Yet people try it time and time again. But if you get that feeling in your gut that you just have to, let us be smart about it. Im using the AUD/USD for the example because nothing has taken a bigger beating than the AUD recently (except maybe the yen).

Who is this idiot counter trading the AUD/USD？ Yep that is my trade.

So how does one intelligently counter trade？ It is the 3 basic elements of all good trades:

• The market is oversold or overbought (technicals).

• There has been a news/data event that should have moved the price action but didnt (fundamentals).

• The risk to reward is worth it (risk management).

So let me break down this counter trade for you:

• Adam and Ryan posted several other charts here and here that show a big support level in the 0.8840-50 area.

• Taper gets announced (fundamental), the US dollar dominates most every currency except the AUD which stays pretty much at weekly support line 2 on the chart. For more than 24 hrs it cant get a good break of support line 2. Price actually hung there for almost a day and a half.

• Most other currencies fall to the dollar, but the AUD just wont sink further.

• There is now technical and fundamental support to counter.

So I‘m a believer now. I’m going to take a long on the AUD/USD. What is the risk to reward？ Is it worth it？

• I set my stop loss just below the swing low which was about 33 pips (yellow line).

• I set the target at just below resistance level 1 at 0.9100.

• So the risk on the trade entered at .8848 is 33 pips, the reward is 252 pips. That is almost 1/8 on risk to reward.

• At 50 pips up the stop loss is moved to break even. Now it is a free trade.

• Im flexible on this trade. If it gets to the weekly pivot .9010 and starts to get pinned as the 100 H4 simple moving average also comes into play, it can still be closed at a risk to reward of 1/5. Of course it could turn around and slam my stop too. There is always that potential.

I do not recommend counter trading, but I get asked about it a lot. It can be done if done correctly. It is also very dangerous to trade at all this time of year as the market is prone to violent irrational moves.

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