A type of swing-trading strategy that assumes a current trading trend will reverse and attempts to profit from that reversal. Countertrend trading is a medium-term strategy in which positions are held between several days and several weeks. Countertrend trading can be used as part of a diversification and risk-reduction strategy. To limit losses in the event that a trend does not reverse, traders should consider using strategies such as stops and time-based exits. Countertrend trading is one of the most common tools used by contrarian investors.
The most commonly used technical indicators for countertrend trading strategies are moving averages, range indicators, such as Bollinger Bands, and momentum indicators such as the ADX, MACD or Chaikin Oscillator.
Confirmation of a countertrend can come from looking at price in relation to a range indicator. For example, was price near the top Bollinger Band when the countertrend movement began? Or, it can come from looking at momentum indicators for possible divergence between momentum and price. Confirmation may then lead the trader to initiate a position in the opposite direction of the trend. Further price movement and technical analysis then confirm a major trend change or the resumption of the existing trend, allowing the trader to position him or herself accordingly in the market.