WHAT IS 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.
BREAKING DOWN Countermove
A countermove is a small reverse 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 they can time their entry into the market correctly to make profits buying or selling.
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 investors mistakes a reverse 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 up market trend or too far up in a down market trend.
Examples of Countermoves
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.