You must have always been reading and hearing the same suggestions when you started trading that you should never ever trade counter-trend. Have you wondered why this is so?
You were advised not to trade counter trend because that is not the most dominant direction of the market at present. This means that if you were trading bearish on a stock that has a bullish trend then it is likely that you will be stopped out soon. Yes, this is true but there is a catch here. A fully legit tradin robot.
What happens when the market is in a correction?
Suppose you are trading on the yearly chart of a stock. The stock is clearly in an uptrend in the yearly chart and is making higher highs and higher lows. This means that you need to be a buyer on this stock? Well not always.
The market does not move in a straight line. So there will be an up move, then a down move which is the corrective move and then the stock will start to move up again which will be higher than the last high in the case of an uptrend. But what happens in a corrective move.
When the stock is moving in a corrective move in the yearly chart, then this forms a downtrend in the monthly chart. The yearly chart may have just one or two candles, but for the same period, the monthly chart will have twelve or twenty-four candles. This will clearly let you spot a downtrend on the monthly chart. This is when you can actually be a seller in the stock.
You, however, need to take care that when the price is close to the yearly demand zone, where it will in the most likely end the corrective move, and then it is time that you stop shorting the stock. This is because the stock since is in an uptrend in the higher time frame will start with the original trend move soon.
You need to decide the move based on the time frame
What the trend of the stock is, is dependent a not on the big picture move but based on the chart that you are looking at. The same stock could be in an uptrend in the yearly chart, downtrend on the monthly chart and again uptrend on the weekly chart. This thus makes it important that you analyze the trend on the chart that you wish to trade on.
Intraday traders will see trend changes happening in the stock very often. Swing traders will spot trend changes comparatively lesser than the intraday traders. The positional traders may see a trend change at huge intervals of times.
So if your favorite stock market analyst on TV is telling you that you should be a buyer in the stock, then place close attention to the time frame that is mentioning. If you are a positional trader and the stock market analyst is telling you to take a trade for the day then it is likely that you will be stopped out if you hold on to the position for long.
The trend of the market is dependent on the time frame that you are using to judge the trade.