Trading by or against the trend

Market could be in two states.

1 State. The chart is going by trend day by day. Sometimes it stops but then continues. If you look at day chart you'll see that exchange rate could rise of fall for a week or even two weeks.

2 State. After any big movement there is a correction state. In that period of time the chart usually reverses for some time. It can go down for 1/3 or 1/2 of previous active wave.

Lets call this movements as waves. After every active wave, there is a passive one. It is called correction. There were written a several books on this theory. It called Elliott wave theory. The size of correction is calculated using Fibonacci levels. It uses golden ratio thus making a correction on 61.8%, 50% or 38.2% of previous active wave. As theory says the size of correction do not repeat twice. That means after 61.8% correction, next one will be 50% or 38.2%.

I know it is a little hard to understand. Sometimes the size of correction is really one of these numbers. Maybe it is because many traders around the world are looking at these levels thus making them like resistance or support levels.

The problem is that its all very subjective. I just recommend not to trade against the trend if currency rate fell under 38.2% of previous wave.

Most of the time you have to trade by trend. This isn't that dangerous. Draw a moving average for 100 days. If the chart is above the MA then you can buy. If it gets near to MA you have to increase your vigilance. Handle it like any other support level.

Now lets talk about trading against the trend.

Generally chart is going together with MA in some distance. You can try trading against the trend if chart has gone very long way from MA. Almost every time it would bounce back a little to MA. Don't wait till it comes back to MA, because it is not the case. Combine this technique together with stochastic and follow all the news out there. If nothing serious had happened then you are free to go into trade. Try to catch a moment when the bounce is developing. Frequently stochastic can give you a signal but the market can be overbought for some time. You should go short after stochastic goes back to <> 80 level during bull market. This protects you from unwillingness surprises.

When you trade by trend you can hold your position very long period of time. If you catch a good moment to make a trade, you can leave till the global trend decides to reverse. On the contrary, trading against the trend, and trying to trade the correction, your trades should be very quick.