DEFINITION of 'Countertrend Trading'

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 traders rely on graphs (such as the Bollinger Band®), indicators (such as the Aroon indicator) and oscillators (such as the relative strength index or Chande momentum oscillator) to make their decisions.

BREAKING DOWN 'Countertrend Trading'

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.

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RELATED FAQS
  1. How risky is it to create a counter-trend trading strategy?

    Read about some of the different kinds of risks involved with trading strategies that rely heavily on countertrend trading, ... Read Answer >>
  2. Why do some traders implement counter-trend trading into their core strategies?

    Learn about differences between trend trading and countertrend trading, and discover why some traders add countertrend trades ... Read Answer >>
  3. How do countertrend trading strategies work?

    Profit from countertrend trading strategies that are used to catch trend changes or to make additional profits from temporary ... Read Answer >>
  4. How do I build a trading strategy with the Chande Momentum Oscillator?

    Learn about the concepts behind Tushar Chande's momentum oscillator, including some simple steps you can use to help build ... Read Answer >>
  5. How is the Aroon oscillator interpreted by traders?

    Learn more about the Aroon oscillator, a technical indicator developed to spot trends in price movements for any given stock ... Read Answer >>
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    Learn more about the Aroon oscillator, a technical tool used by analysts and traders to measure the direction and strength ... Read Answer >>
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