|Trading systems||Countertrend systems|
Basically, the goal with the countertrend system is to buy at the lowest low and
sell at the highest high. The main difference between this and the trend-following
system is that the countertrend system is not self-correcting. In other words, there is no set time to exit positions, and this results in an unlimited downside potential.
Types of Countertrend Systems
Many different types of systems are considered countertrend systems. The idea here is to buy when momentum in one direction starts fading. This is most often calculated using oscillators. For example, a signal can be generated when stochastics or other relative strength indicators fall below certain points. There are other types of countertrend trading systems, but all of them share the same fundamental goal - to buy low and sell high.
Disadvantages of Countertrend Following Systems:
• Empirical Decision-Making Required - For example, one of the factors the system developer must decide on is the points at which the relative strength indicators fade.
• Extreme Volatility May Occur - These systems may also experience some extreme volatility, and an inability to stick with the system despite this volatility will result in assured failure.
• Unlimited Downside - As previously mentioned, there is unlimited downside potential because the system is not self-correcting (there is no set time to exit positions).
The main markets for which trading systems are suitable are the equity, forex and futures markets. Each of these markets has its advantages and disadvantages. The two main genres of trading systems are the trend-following and the countertrend systems. Despite their differences, both types of systems, in their developmental stages, require empirical decision making on the part of the developer. Also, these systems are subject to extreme volatility and this may demand some stamina - it is essential that the system trader stick with his or her system during these times. In the following installment, we'll take a closer look at how to design a trading system and discuss some of the software that system traders use to make their lives easier.
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