Buy Low, Sell High: A Look at Contrarian Trading Strategies
With many common trading strategies like range-bound strategies and break-out methods getting most of the attention in many popular internet communities, it might seem like there are reduced options for those looking to “buy low and sell high.” To be sure, there are many advantages to trading breakouts and ranges. Breakout strategies can be used to beat market participants in terms of catching long-term trends and capturing a majority of the profits and losses within those trends. Breakout traders are always looking for critical breaks of support or resistance levels as an indication that market sentiment is changing and that previous pricing valuations are no longer appropriate. But there are some risks involved with these strategies, as there is always the possibility that you will encounter a false break and this is the reason protective stop losses must always be used.
Swing Strategies as an Alternative
Given these risks, it makes sense to look for some alternative methods that can be used in alternate market environments. “Since market conditions are always changing,” said Haris Constantinou, currency analyst at TeleTrade, “traders will not be able to implement a single trading strategy on each trading day.” There will be many instances where no breakouts or ranges are visible and any major impulsive moves have started to reach an exhaustion point. So, what should traders do in these instances? Stay on the sidelines and wait for market conditions to change?
Unfortunately, one of the main facts of forex market trading is that the market will never come to you (i.e. adapt to your pre-determined strategy). That is to say, the market will never alter its behavior to meet your trading requirements or investment criteria. The forex market is an active and dynamic place, so you will need to be proactive at all times and look for new opportunities as they develop.
One possibility is called the Swing Trading strategy, which will enable you to see trading opportunities when breakouts are just not occurring. Swing trading involves finding positions that capture gains (usually over smaller time frames) using changes in price momentum that work against the dominant trend. For example, buy positions would be initiated once a downtrend has reached an exhaustion point. To determine the exhaustion point, a few different methods can be used. Indicator readings might become overbought/oversold, or candlestick patterns might indicate major reversals (for example with a doji or evening star pattern). Conversely, prices might start to make lower highs in an uptrend, or higher lows in a downtrend.
Swing trading allows traders to buy low and sell high in ways that are simply not possible when using breakout strategies. Because of this, traders must act fast to capitalize on these positions, as swing reversals can happen quickly. Stop losses in these trades should also be kept relatively tight because the majority of the market’s momentum is working against the position.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.