Trading Against the Trend - Unwise

Trading against the trend is not a great idea when you think about it. Everyone seems to want to pick the top or the bottom but there are so many consequences to that kind of thinking.

1. It is low probability

I have heard people say if only they would have picked the bottom they would be up 40% right now. That may be true, but how could you have picked the bottom? You can’t really use any fundamental analysis techniques because the market is always thinking 6 months in advance.

You can use technical analysis, but the accuracy of technical indicators drastically falls when it is trading against the trend. In other word you can’t really pick the exact bottom unless you get lucky.

2. It is emotional

If you do a lot of research and pick a great stock at the bottom and that stock falls another 30% that can be very emotional. How could you be wrong after all? You did all your homework. No matter how much you have studies the fundamentals of a company the trend is still likely to prevail.

3. Lets Losses Run

If you short a stock because it is trading way too high, then you are opening yourself up for a massive loss. If the stock goes up another 20% then it looks like a much better deal than it did before because now it is even higher. In fact the stock looks like a much better deal as it goes higher and higher until eventually your broker sells the stock for you because you have lost too much. Trading against the trend can just be a very unwise decision.

For more on counter trend trading visit http://www.stocks-simplified.com/counter_trend_trading.html

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