What Is a Countermove?
A countermove is a movement of a security's price that opposes the trend in price. A countermove happens right after the original trend, but in a smaller amount than the original trend. Investors and traders watch for countermoves to be able to enter the market in a favorable position.
A countermove is also known as a retracement.
- A countermove is a move in a security's price that is opposite of the current trend.
- If the price is trending down, a countermove is a small rally in price. If the price is trending up, a countermove is a small dip in price.
- Investors and traders often seek out countermoves to obtain a security at a beneficial price point in order to turn a profit.
- A trader seeking a long position would buy a security at a down countermove while a trader seeking a short position would sell at an up countermove.
- If the original market trend does not return, then a trader will lose money on their position.
- Traders can place stop-loss orders to prevent a significant loss if the trade does not go as they had planned.
Understanding a Countermove
A countermove is a small reversal in the price trend for a given security. If the price is trending down, a countermove is a small rally in price. If the price is trending up, a countermove is a small dip in price. Investors and traders can become proficient in recognizing countermoves so that they can time their entry into the market correctly to make profits by buying or selling.
Being able to determine a countermove is difficult because predicting the movement of any stock price is difficult. For example, if a stock's price dips, a trader may believe this to be a countermove, when in fact it could be the emergence of a new trend where the stock price continues to fall, with no return back to the previous higher level.
It is important to pay attention to the fundamentals and valuation of a stock rather than the fluctuations in price to help estimate its most likely trajectory. For this, investors employing a buy and hold strategy usually do not play the market with countermoves as a strategy to make profits.
Implementing a Countermove
A trader who wants to take a long position, which means buying low to sell high later, can recognize a price trending up. When a countermove down occurs, that is a good time to buy, at a slightly lower price than the immediately previous price, before the trend is restored and the price continues to rise.
Conversely, if a trader wants to take a short position, which means selling high and hoping to buy low later, they wait as the market falls to find a countermove, in which the price goes up slightly from the immediately previous falling price. When this countermove up occurs, the trader will sell, and then the market will return to the previous downward trend, and the trader can buy low to close the short position.
Because countermoves are smaller than the general trend, profits made immediately on taking a position are small, and real profits are only realized after the trend continues. If a trader or investor mistakes a reversal for a countermove, and the market trend doesn't return, the trader or investor can lose money.
This risk is high, even for experienced traders and investors, and is the main reason for instituting a stop-loss order. A stop-loss can prevent the market from going too far down in an upmarket trend or too far up in a down-market trend.
Example of a Countermove
If a stock price goes from $10 to $15, that is considered a move. If the stock price then goes down to $12 before climbing back up to $17, that would be considered a countermove. In the other direction, a stock price going from $40 down to $32 would be a move, while a brief climb back up to $36 before going down to $30 would be a countermove.