Trend Trading Vs Contrarian Trading

Filed under: Learn Forex Trading |

 

Screen shot 2013-05-13 at 10.50.21There are two basic types of trading styles in the forex markets (or indeed any other kind of market) – these are ‘trend trading’ and ‘contrarian trading’. Trend trading involves trading in line with the dominant trend, while contrarian trading involves trading against the dominant trend. Different types of traders and personalities trade in different ways, and I will run through some of the pros and cons of each of these trading perspectives in today’s forex-related article.

 

I have talked about trend trading and contrarian trading before, but they are concepts that you really need to grasp and be aware of. For the beginner, it is much easier to trade with the trend, as contrarian trading requires a good deal more skill and knowledge. Trend trading basically involves identifying a trend (by moving averages or a visual inspection), finding a good entry point during that trend (via, for example, a bullish price action signal, confirming the trend), and then letting your trade run until there is reason to assume that the trend may be coming to an end.

 

Contrarian trading, on the other hand, involves trying to make a trade based upon when you think a trend will be coming to an end, or when you think market sentiment is going to turn. This could be at a significant area of support/resistance on a chart, and you could use price action signals to confirm this suspicion and enter a trade. However, this is much harder to time, and much easier to get wrong than trend trading. Thus, for beginners, trend trading is probably the way to go – while at the same time watching and observing possible contrarian trade setups, and learning as you go. Unfortunately, many beginners to the forex markets are drawn to contrarian trade setups, and as such, there are many losers in the forex markets.

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