Contra Trend Following Techniques

[Trendtrader66]

I have read that some fund managers use several types of non-correlated trading strategies. These strategies might include long term trend following systems, short term trading systems, and contra trend following systems, all within their portfolio to hopefully improve their risk adjusted returns.

I am interested in learning about these contra trend following strategies but do not know where to begin! What would these strategies involve? What sort of technical indicators would be used for identification? Would Options be used, such as shorting volatility?

Thanks kindly for your help!

[Kiwi]

Options can be used in a variety of ways. You could sell into a rise or you could sell vertical spreads into a rise to reduce you cost of sale ... for a smaller profit.

The biggest question with counter trend is when to exit as the counter trend exit is not as obvious as the trailing stop for trend following.

John

[blueberrycake]

The biggest question with counter trend is when to exit as the counter trend exit is not as obvious as the trailing stop for trend following.

Exactly. If you are selling into a rally because you believe the price is overbought, what do you do when the price goes even higher making it even more overbought according to your system? It's not an insurmountable problem, but it's one that I've always had difficulty with when building counter-trend systems.

You end up with a system that cuts its profits short and lets its losses run. Now many such systems will still have a positive mathematical expectation. Their problem is on the money management side, where you have to bet tiny if you want to avoid massive drawdowns.

-bbc

[TradingCoach]

from Larry Conners and Linda Raschke wrote "STREET SMARTS", a book filled with trading ideas. I have the TS 2000i code for the "turtle soup" code - if need it PM me.