When to trade Counter-Trend using the Sequence and WoW trades

22nd July 2014, 09:24 PM

You have probably heard or read things like The trend is your friend or Trade with the trend until it
bends/ends.

We should all be aware by now that trading with the bigger picture's trend is higher odds than trading
counter-trend. However, there sometimes waiting for the right zone to enter a trade can take a long
time, days, even weeks, if we are trading medium/long term.

Before you continue reading, ask yourself these important questions:

• Are you profitable trend trading? If no, why should you counter-trend? Counter-trend is
trickier, more difficult and lower odds

• If you are profitable, why should you counter-trend then? Aren't you happy and you want
more and more?

• Think about it....

Do not get obsessed with counter-trend, it can blow your account up, you will see counter-trend
trades EVERYWHERE.

HOW DO I KNOW I'M TRADING AGAINST THE TREND?

Every trade we take will probably be counter-trend. We can't assess if we are trading against the
trend UNLESS we choose a timeframe combination (a sequence) to compare it with.

How does choosing a sequence help in identifying the trend? When am I going against the trend?

This is what we need to do in order to know if we are going counter-trend:

• Choose a timeframe combination (sequence), eg: Monthly, Weekly and Daily

• Choose an entry timeframe: Daily

• The biggest TF in the sequence dictates the bigger picture's trend, anything against it would
be considered counter-trend: Monthly up? Any shorts would be counter-trend

• Any trade that goes against Monthly trend will be considered counter-trend. For instance: M
is up, W is down. Taking a D1 short is going against the trend

If a different sequence is chosen, eg: Weekly, Daily, H4. If Weekly is down, daily and H4 are up, longs
will considered counter-trend since the bigger TF in our sequence is down. That daily long will be
counter-trend in that sequence but it will be a trend trade if Monthly was up and we had Monthly as
our biggest timeframe.

We need a sequence in order to check our entry TF against. If the direction of our trade goes against
the biggest timeframe trend in our sequence then we'll be going against the trend.
WHEN TO TRADE COUNTER-TREND

We need to be mindful of the Sequence and Realignment rules and the WoW trades, because they
are the tools/patterns we have in order to locate and plan counter-trend trades. There will be clues
on the charts that will allow us to make decide if we want to take the risk on a counter-trend trade.

These are the patterns we should be waiting for to counter-trend

1. Engulfing patterns at all time highs and lows

• Price is over-extended on MN/WK timeframes and we start seeing MN/WK engulfing

patterns, dark cloud covers and HTF 20 EMAs are far from price, these will be the first
weakness signals we'll see

• A MN or WK engulfing pattern will most likely be accompanied by one or more D1

engulfing or piercing patterns

• The D1 chart should be over-extended and a D1 WoW trade will be clear

• It's very normal to see several engulfing patterns on the D1 TF on top of each other
right within a WK zone. Seeing 2 x D1 engulfing is normal, which will most likely allow
us to link the valleys/peaks formed to draw a TL

2. A MN/WK timeframe is hit but price cannot close above/below it

• A series of WK candles cannot close above a resistance or supply zone

3. Price cannot close above/below a last month high/low (support/resistance)

• A last month/week low/high is hit and a series of WK/D1 candles cannot close
above/below it

• We'll see a series of rejection/reversal candles like shooting stars, hammers and
inverted hammers, dojis, spinning tops

• We need more than 1 rejection candle to confirm that the zone is holding and we
could have a bigger retracement and a counter-trend

4. Price cannot trade through and close above/below a flip zone

• See point 3, we'll be waiting for the same patterns

5. Candle close versus trade through

• It's wise to wait for a candle close on the D1 or even WK TF when trying to counter-
trend

• If the opposing zone is on the WK TF, it's advisable to wait for the WK candle close
before going counter-trend. Overshot levels and fake breakouts are very normal

6. Look at price action to the left: compression and efficient rallies/drops is an odd enhancer

• Look left and analyze price action, compression is good for counter-trend because the
compressed areas are easily absorbed when price is reacting to a bigger timeframe
and is over-extended and there is a counter-trend impulse
 • Compression is normally formed of SD zones that have been tested on the way up,
what some call efficient rallies/drops. I call it non-emotional trading

7. Stay away from bigger timeframe Trendlines and 20 EMA confluences

• If the pullback to our counter-tend level happens after a bigger timeframe TL has been
hit, wait for confirmation. Don't try to go against a bigger TF TL confluence, you will
be trading against a brick wall that you want to see broken

• The same applies to 20 EMA confluences on WK and MN timeframes

8. At least 1 Daily zone has been taken out and room to drop to previous Daily zone

• Don't try to outsmart the markets taking H4 and lower timeframes entries counter-
trend because you think that Monthly demand will be an inflection point

• The bigger the TF price is reacting to, the bigger the TF you need to use for
confirmation. Use at least a Daily imbalance to try counter-trend if price is at a
Weekly/Monthly zone and wait for at least one opposing D1 zone to be taken out

HOW AND WHAT TO USE TO TAKE A COUNTER-TREND TRADE

As repeated above, We need to be mindful of the Sequence and Realignment rules and the WoW
trades, WoW trades are used for counter-trend, D1/WK WoW trades happen after over-extension and
can provide CT trades if we have the right price action to the left.

You can also use a nested fractal sequence in order to trade against your initial trading sequence.
You can learn more about nested fractal sequences in this Nested Sequence lesson.

This 45 minutes video explains some of these patterns. NZDUSD MN/WK realignment is discussed in
detail.