“The trend is your friend,” how true is this phrase?
A seasoned trader will say – without a glitch in his eye that the statement is 100% true.
And it is true, except if once or twice you have tried trading against the trend and earned while everyone else lost.
In which case you would be a lunatic, like myself, a contrarian trader. For engaging in such risky games.
To prove that contrarian trading is just as good for opening quality positions as following the trend is for staying safe trading, I activated the sentiment indicator on Olymp Trade.
For those who aren’t already familiar with the sentiment indicator, Olymp Trade’s sentiment indicator (also trader’s choice) is a trading tool that shows the ratio for all open trades.
It has two bars (red and green) visually showing how traders interact with the market.
The red indicator bar shows that traders are opening down trades while the green bar shows that traders are opening up trades.
Sentiments also shows the popularity of the assets in percentages – making it easier to read.
From an investors view point, I noticed that while most times sentiments represented the exact happening on the market, other times it gave diverging trend signals.
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While sentiment indicator captured most traders opening up trades (obviously short trades), the trading chart reflected the opposite (prices were dropping).
And they kept dropping, hitting new low prices until 7 candlesticks later (35 minutes later).
Tell me what that means if not looses for traders with expiration under 1 hour and constantly trading up.
What Happens if the Market has a Downtrend and More People Continue to Buy?
As much as there are possible losses for traders who go against this trend with shorter expiration; such markets eventually yield to trader pressure thus the market ends up taking a new direction.
This is basically because when bulls continue to BUY; a demand is created for new high prices – hence a possible trend reversal for a new trend. An up trend.
What Happens if the Market has an Uptrend and More People Start Selling?
If the market is pessimistic, prices are expected to fall. And even through the market may continue to show an up trend; a contrarian trader would trade against the trend – because they expect a trend reversal.
Are there strategies for trading against the trend?
Of course there are.
In this post we discuss the reflection strategy as an ideal method of trading against the trend.
Reflection is a counter trend strategy which uses a combination of Slow Stochastic oscillator, Japanese candlesticks and price levels to generate trend reversal signals.
Each indicator plays a major role in determining when the reversal will happen.
How to Set up the Reflection Trading Strategy in Olymp Trade.
Login to your Olymp Trade Account.
If you aren’t already registered, register here.
- Now change the charts to Japanese candlesticks and change the time frames to 1, 5, 10, or 15 minutes.
- Next, add the slow stochastic indicator to the chart.
- Use the horizontal line to add four price levels to the chart – setting them up at an interval of 50 or 100.
How to Pick Signals for UP Trade with this Strategy.
To open an up trade with the reflection strategy, watch out for these three signals: –
- Ensure that the price charts (japanese candlesticks) have touched any of the four price levels or crossed it top down.
- Confirm that the slow stochastic has gone above its 20 price level.
- Lastly, check if a reversing candlestick model has formed on the chart. The last green candlestick should cover the the previous red one.
How to Open a Down Trade With This Strategy.
To open a down trade with the reflection strategy, watch out for these three signals: –
- Ensure that the price charts (japanese candlesticks) have touched any of the four price levels or crossed it bottom up.
- Confirm that the slow stochastic has gone below its 80 price level.
- Lastly, check if a reversing candlestick model has formed on the chart. The last red candlestick should cover the the previous green one.
What’s the ideal expiration for trading with this strategy?
Make the trade time 5 times higher the time frame on your chart.
With a 5-minute time frame – 20-25 minutes, 10-minute – 50-60 minutes; 15-minute – 60-70 minutes.
How not to lose money when trading the reflection strategy.
- Only open a position after you have seen all the three signals. They might not appear simultaneously – so look out for one signals succeeding another.
- Use the strategy to trade on indexes.
- Use this strategy to trade between 10:00 AM – 8:00 PM EAT (If you are not from East Africa, use this tool to convert time)
- Trade on assets with at least 80% return on investment.
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