Retail trading is done by a distinct investor with an aim to purchase or sell shares for their own account. It is not for an organization or a firm. The transactions in retail trading are normally in smaller amounts. Experts believe, market efficiency is impacted by the emotions of a retail investor. It has been recorded that investor opinion affects asset prices. Investor emotions, as evident in the demand from the retail investor, could lead to prices moving from basic principles.
A strategy in retail trading is called as trend trading. Trend trading characterizes the elevation of normal thought process. Historical evidence suggests that the most prudent decision in the stock market would be, to be part of the group.
Emotion is critical for the behaviour of a group. It is evident that the confidence of the group results in an impetus. The trader is safer by being part of a group. Based on the evidence from the speculative sentiment index, the trading group usually goes against the trend.
It would be practical to look at two groups operating in the market at a particular time period. One group would be the mega institutions that have the information and are cash rich to make an impact on the market. They comprehend the pulse of the market well. On the other hand, the retail group that is looking for substantial gains, though they are not cash rich and are usually seeking to assess a change or be the market driver with an aim to increase their investment significantly.
The best option for a trader following a distinct trend is to identify one based on technical indicators that the retail group is opposing and then using the trend assertively till the retail group begins to follow it, at which point one can use the reversal.
It is evident from various trends in the market that the movement of trend and group sentiment are correlated. For e.g., if the trend is lesser, the retail group is purchasing, and if the trend is higher, the retail group is making a sale.
The counter trend trading strategy is very popular among traders. Though traders on the whole would confirm that trading in the path of long term trend would be the most optimal method for trading, certain traders seek to trade a stock pair as it moves backwards from the general trend.
A counter trend trading strategy is utilized to penetrate a market that could be moving in another direction or to book a profit from the normal reversal that happens over a period of time. In order to leverage market price actions, an efficient trader uses trend-based strategies if the market is progressing in particular trend. Countertrend strategies are developed to benefit from the provisional actions compared to the trend and ensure the trader is able to enter the market at an excellent base price at which point the trend normally modifies.
The traditional technical indicators for countertrend trading strategy are moving averages, range indicators (Bollinger Bands), momentum indicators (ADX, MACD or Chaikin Oscillator).
The evidence for a countertrend would occur based on assessing the price in alliance to a range indicator.
Usually, the stock pair upon making a robust move over a long duration in a particular way, would have a reversal. The more robust the transfer in the route of the trend, the more robust would be the reversal. Technically, it is called “Fading the move”. In this scenario, the trader would wait for the forward movement to stop.
It could be determined by the kinds of candlesticks that occur at the point where it stops. A trader would want to identify dojis, long wicks or bullish reversal candle patterns with regards to the level of support that occurs.
Normally, if the stoppage happens, the trader would then initiate measures to “fade” the transfer. In simple terms, they would manage the trade in the other way.
Mostly, the “Fade the Move” strategy is utilized by intrinsic traders for a short period of time after an information broadcast robustly shifts a stock pair in a particular way. The expectation is that, once the early increase in the price happens, the reversal would take place and then the trader could “fade the move”.
It must be understood that whenever a trader is trading in counter to the existing trend, based on an extended or smaller term chart, a trader is getting exposed to more risk. According to experts, there is no link between the robustness of the transfer and the quantity of the reversal. This is a critical factor if the trader is trading in counter to the trend, the fundamental forward moving trend could possibly come back at any point.
If a trader was using the counter trading strategy during a downturn, the trader would look for the pair to stop in the transition to the downturn and then the trader would “Fade the Move” by purchasing the pair.