I’m a big believer that you need to know how to trend trade first and foremost. But by definition of a trend trade you need to know what a counter-trend is also.  A trend trade is a trade taken in the same direction of the next higher time frame, and a counter-trend trade is one taken against the direction on that next higher time frame. The “next higher time frame” is generally designated as the time frame 5 times the current time frame. Ex: if your current time frame (or the wave of a lesser degree) is a daily chart, your next higher time frame would be a Weekly chart as 1-day x 5 = 1-week.

The most important decision you can make when it comes to which type of trading will be most profitable is what type of market you are in.  The Daily chart will generally spell it out for you. If you have a see-saw pattern on the daily chart such as we see today — 8/31/09 –on many of the majors, then you are in a counter-trend market.  The next most important decision you need to make is in selecting your tools. You don’t want to use a hammer to sink a screw. If you recognize you are in a counter-trending environment, which is one where you are seeing fast reversals and plenty of up and down action with short trend lines, then you need to go with a counter-trending tool. One of the simplest counter-trending tools is Bollinger Bands. One of the most eye opening tools for counter-trending markets are Gann lines, where we divide a market move from top to bottom into 1/8ths.   

As they say a  picture is worth a 1,000 words. Here I’ve adjusted my retracement tool to become a GANN tool and you can see how effective it is when combined with the Bollinger Bands. We see both the 3/8ths level hold and then the 7/8ths level do it’s job and provide a low risk resistance level, both of which are classic Gann behavior.

Trading is like any other job in that you need to have the correct tools, and know how to apply them.

Jay Norris
www.trading-u.com