How to Profitably Counter Trend Trade

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Video Transcription:

Hello traders! Welcome to the Price Action Course and the third module ‘making entry’s and exits, sniping for levels.’ In this lesson we are going to teach you how to profitably countertrend trade. Now we are going to use everything we have learned so far and we are going add a few rules when countertrend trading because it is not the same as trading over extended moves when we are just profiting from a deep correction.

Now let’s start with a little bit of recapitulation of what we have done so far. Trading over extended moves and countertrend trading is not the same thing. When trading over extended moves, you look to profit from deep corrections, entering at key ratios and levels and taking profit at the next important zone. Countertrend trading is a bit more complicated because we are looking for exhaustion moves, in-trends, and writing a new structure. We are going to use everything we have learned so far to look for the spots. But instead of just profiting from a correction, we are going to look for a break of the old structure. So we are going to use key levels and the ratios to look for areas where price might reverse and we are going to look for a break of the old structure for us to be able to countertrend trading.

Counter Trend Trading

We are going to add a few rules here. The first one, we are only going to look for ratios above the 161-8 and above. So we are going to look for spots at the 161-8, the 2, the 224, et cetera. We are going to wait for a break of the overall structure. If we decide to enter at the confluence area, we are going to use starter position. This means that if you decide to enter at the area where we have the previous important zone and the ratios in confluence, you are going to use a small position because price might just reverse to a new area where we are going to find buyers in an uptrend and sellers in a down trend. This means that price might just correct to these zones to continue with its overall trend.

We are only going to add once a structure breaks. So if you decide to enter at the confluence area, you are going to add a real position when the structure breaks. And if you are not using an aggressive style, you are going to just enter the market once the structure breaks. And targets should be below the 50 retracement level at key zones.

Counter Trend Trading

So let’s move to the charts and let’s put this in motion. Okay, so this is the GBP/USD one-hour chart and we are looking at this zone right here for an extension of this down move. Now what we are going to do is we are going to place a vertical line here and we are going to go to the daily to see if we can find in the historical price action a very important support area right here. So we are going to go to a daily chart and you can see that we have found actually that we are at a very important support zone. So we are going to draw this with a horizontal line, okay? And we are going to use these lows. You can see that price broke and then retested this area, then moved up, then retested again, again and again — four times before moving to this high right here.

So what we are going to do is, we are going to go back to the one-hour chart to see if we can find important ratios for countertrend trading. Here we are at the one-hour chart and let me just get rid of this vertical line. And what we are going to do is, we are going to measure an extension at this level and we are going to see if we have a 161.8 or higher. We are going to grab our Fibonacci extension tool and we are going to plug it just right here. And we are looking for a 161.8 or higher so I’m going to use first of all the 161.8. You can see that we are right there at the 161.8.

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What we are going to do is draw a line from this high. I’m sorry, I think we are going to draw a ray because we don’t know what is going to happen. We are looking for a breakout of this structure right here. You can see that price went and tested this area once, twice, then faked out this area, retested it again before moving to these lows right here. Now, if you want to countertrend trade aggressively you can start a long position here with the stops below the 58.80 area and you should start with a starter position. What we are going to do is we are going to wait for this structure to break.

Let me thicken this out for your a bit. There you go. You can see that we bounced off this support area and the 161.8 and we moved here. We broke with the structure, the down structure, but we failed to close above the structure and above an important level, which is the 1600. And we made a very bear-ish candle with a huge wick to the upside. So this is why it’s important also to wait for the candles to close because if you get in at the middle of the candle right here, you will be in a losing position.

If you move forward, you can see that we actually went all the way down and retested the same area where we found a lot of buyers because this candle failed to close below these lows and moved all the way up this consolidation area. And now, right here we have a candle that breaks with the structure and we have all the rules in place. Okay? We have broken with the down structure. We bounced off the 161.8 and we closed above the down structure, above the trend line, and we have a long position. Now, you can go long right here or you can wait for the retest of the trend line.

We are going to look for our target zones. And this is what is important about countertrend trading. Okay? Because if you are just looking for a trader or for an over-extended move, this would have been the trade. You got long here and you took profit at these lows right here, which are the next important zone. And you can see that we actually found a lot of buyers here. Now what we are going to do is we are going to draw a horizontal line at this level right here. And we are going to draw another horizontal line at these highs right here.

Now, these are two zones that are important to us because if we fail to break or if we fail to close above these lows, which are a very important resistance zone, we are not going to be able to countertrend trade and price is going to move lower. These highs right here tested as resistance as support and resistance again, so we are going to find a lot of sellers right here.

Fibonacci Retracement Level

If we take our Fibonacci retracement tool, let’s find an appropriate zone to take profits. And we are going to look for a 50 ratio or higher to countertrend trade. You can see that these lows are at the 50 level and these highs are at the 61.8. If we take this long position right here, if you are looking for a true countertrend trade, your stops should go below this low. But if you are not comfortable with stops that are too wide, because this is a 139 pip stop loss, if you are not comfortable with a 139 pip stop loss, you should put your stops below this area that broke and was retested before going lower. So your stops should be about 60 pips, which is nice.

So we take the trade right here and we are looking for this area. The 61 area looks very nice because it’s confluence of a psychological round number, the 61.8 and this previously tested area of resistance. And if you look closely price does retest these highs and the trend line. So, if you are not aggressive at all like I am, you wait for the retracement and this should give you a much better risk-to-reward ratio because right here you would be just risking 27 pips for a possible return of 112 pips. Now, the thing about this is that you can actually wait for price to test this area and take half your position off and move your stops to the 60.22 area.

So, let’s see what price does. Price goes down and retests these zones right here and goes up and hits our target. So right here, you can see that price breaks with the down structure and then moves up for about 120 pips. So you can actually take half of your position here and put your stops below these lows, which will mean that you are looking in 49 pips on half of your position. And you can see that price actually retests this area and breaks with the above structure. And right here, you can take your position off entirely at the 76.4, which is the next important Fibonacci ratio and of course these lows right here.

You can see that when you are countertrend trading, it’s very different than when you are trading over extended moves because you have to wait for a true break of the structure. And if you are not actually aggressive, you have to wait for a retest of the actual structure that just broke for price to go higher in this case because we are countertrend trading a down move. And if you are countertrend trading an up move you are going to the same thing but on the opposite side of the market.

Of course another thing is that you need to be patient. When you see price retrace to a previously broken area it doesn’t mean that price is going to go lower in this case. Remember that price most likely will always retest an area that has been broken. In this case it broke with the down structure, it retested it again before going higher. We hit our profit targets at the 61.0 and then price retested these lows that were just broken before breaking with new highs.

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