As with any strategy, traders should be familiar with the market they are trading. For example, an upward trend reversal is quite difficult to trade in equities. In retrospect, everything looks quite logical, but the exact point of a change in direction is very difficult to determine. It happens very suddenly and hardly predictable, but then again explosively.
The reasons for this are relatively simple. Investors with a lot of capital use cascading buy stops when following a downward trend. For the private trader, this is only marginally interesting, but it makes clear why the contra trend strategy is easier to implement in a rising stock market with put options.
When trading currency pairs, on the other hand, the direction is usually irrelevant. It should also be noted that the maturity plays a particularly important role in the contra trend strategy with binary options. The countertrend must start immediately after the option is placed. Otherwise, it is unlikely to end up in the money. With classic derivatives, one of the two directions can be topped up. With binary options, this is also possible with the "ladder" feature. However, the handling is somewhat more complicated and is only something for experienced traders.
If a put option is placed in an upward trend and the price subsequently goes even higher, it is likely to lose. It is therefore advisable to use a put option with a lower capital investment in an established upward trend.
When does the contra trend strategy make sense?
The strategy is particularly useful in trending markets at https://exness-vietnam.asia/mt4/ that are characterised by setbacks. These situations are standard in most markets. There is hardly a market that develops in one direction without setbacks in the long term.
The contra trend strategy can also be applied after a breakout. Such breakouts based on consolidation are often followed by price setbacks. In the case of stock markets, however, these setbacks are also very unpredictable. To apply the contra trend strategy after breakouts, the trader should sit in front of the PC for as long as possible and observe the price closely.
However, the strategy is most frequently used as a put option in an upward-trending stock market. In addition, a call option with a higher weighting is used. The contra trend strategy is then used in particular at significant resistances, i.e. cross resistances or new highs, when a trend line is broken and when divergences occur.
Conclusion on the Contra Trend Strategy
The strategy can be used in many situations. For a successful trade, a sure instinct and good knowledge of the market are required. Often suitable situations appear plausible in retrospect, but could not be predicted in advance. We recommend the contra trend strategy especially for upward trending indices and stock markets. In the case of currency pairs, the trend should have existed for a long time in order for the strategy to work in the end.