How to combine trend and countertrend indicators into logical strategy


combining trend and countertrend indicators on Olymp Trade“Trade with the trend.” Have you heard it somewhere? This is an oftentimes suggested rule for opening transactions. To not go against the trend but to play along with it. However, there is also an opposite approach to trading that recommends buying at the bottom and selling at the top (buying at the lowest price and selling at the highest). You may find it difficult to decide what will be best for your trading performance. And you know what? It is possible to combine both in one successful strategy. Let’s see how to do that.

Combination of trend and countertrend indicators

To trade with trend and countertrend indicators together, you must find a technique that recognises a long-term trend well and then a countertrend technique that will show you pullbacks inside this long-term trend. Sounds a bit complicated? Let me describe it in a few simple steps you should take.

The first step: recognising a long-term trend

You can identify a trend with the use of moving average with a period of 200. We know there is an uptrend when the price closes above the MA200 and the downtrend occurs when the latest close lies below the moving average line.

SMA200
SMA200 is a great indication for finding long-term trend

Nevertheless, we want to catch a long-term trend and so we add two more moving averages. One with the period of 10, and the second one with the period of 30.

With such a setup we can assume that the prevailing trend is up when the 10-day moving average goes over the 30-day moving average and the latest price close lies beyond the 200-day moving average.

We may identify the present trend as a downtrend when the 10-day moving average is beneath the 30-day moving average and the latest price close is situated lower than the 200-day moving average line.

A downtrend defined with 3 moving averages
A downtrend defined with 3 moving averages

The second step: using a countertrend tool

A countertrend indicator will be added to catch short-term pullbacks inside a long-term trend. There are many tools you can use. Here, we will work with an oscillator. We will use the Relative Strength Index (RSI) with a period of 7.

The third step: trend and countertrend indicators in conjunction

We have added 3 moving averages, 10-day, 30-day and 200-day, and the oscillator to the chart. The idea is to catch the pullback which suggests the price will continue in its previous direction.

In our example, there is an uptrend in the market. So you are waiting for the situation when the 10-period moving average plots above the 30-period moving average. The latest closing of the price should be placed above the 200-day moving average. The RSI from the current candle should be over the previous one. And the RSI value from the previous candle should be below 50 and beneath the value of the oscillator from the earlier candle.

RSI is reversing with the bottom under 50
Buy when there is an uptrend and the RSI is reversing with the bottom under 50

For trading during the downtrend, you should wait for the opposite. See the picture below.

RSI is reversing with the top over 50
Sell when there is a downtrend and the RSI is reversing with the top over 50

Summary

You should be aware that the technique that combines trend and countertrend indicators generates potential trading signals but does not promise consistent profits. You should always test a strategy and there is a demo account in the Olymp Trade offer where you can do it without any risk. It is supplied with virtual money so take your time and find out how the method of trading described in today’s article work for you.

You should also ask yourself what amount you can invest and how much you are ready to risk. Furthermore, think about the ways of protecting your balance account and about your profit goals.

Many different trading methods exist. Have you ever consider combining trend and countertrend indicators into one system? Now you know it is possible. Give it a try and enjoy trading!

Good luck!

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