What Is "Buck the Trend"?
"Buck the trend" is a colloquialism that refers to when a security's price moves in the opposite direction to the broad market.
- Buck the trend is a colloquialism that refers to when a security's price moves in the opposite direction to the broad market.
- In technical analysis, bucking the trend is often seen as a powerful reversal signal, as it indicates that investor sentiment is starting to turn against the prevailing market direction.
- Buck the trend is a strategy that is most commonly used by contrarian traders.
Understanding Buck the Trend
The expression "buck the trend" often describes more than just security prices and can also include business and market fluctuations. If a company is recording increased sales, while its competitors lose business, the company would be bucking the trend. In technical analysis, bucking the trend is often seen as a powerful reversal signal, as it indicates that investor sentiment is starting to turn against the prevailing market direction.
A security can buck the trend in either direction but, typically, it describes the security performing better than the broader market's negative performance. For example, in Feb. 2018, memory chip maker Micron Technology Inc. (MU) “bucked the trend” and rose over 2% after providing a stronger-than-expected chip outlook, while the broader market (Standard and Poor’s 500 index) was down nearly 4% over the same period. Short-term traders often take positions in stocks or sectors that are bucking the trend of the overall market and showing signs of relative strength.
A stock bucking the trend is usually a bullish signal when that stock resists a prevailing downtrend in its own industry or against the broad market. This suggests that investors have an interest in the stock despite the negativity surrounding its competitors and peers. Market commentators may use the term when discussing the broader stock market in relation to presidential election cycles. For instance, in the final year of two-term presidencies dating back to 1928, the stock market has lost an average of 4%. In 2016, however, the stock market bucked the trend and rose 9.5%.
Buck-the-Trend Trading Strategy
Traders can use multiple time-frames to create a buck-the-trend trading strategy. A 200-day moving average can be applied to the daily, hourly, and 15-minute chart of a stock to determine a trend's direction.
When the trader is looking for a buy entry point, the stock’s price should be trading well above its 200-day moving average on both the daily and hourly charts to show upward momentum. The buck-the-trend component of this trading strategy uses the 15-minute chart; traders can make an entry when the price bucks the trend on this shorter time frame. This shows a temporary retracement in the long-term trend and provides a high probability trading opportunity.
Most investment professionals suggest trading in the direction of the prevailing long-term trend. Contrarian traders who attempt to profit from bucking the trend, such as by picking market tops and bottoms, should place a stop-loss order close to their entry point to close trades that don’t work out.