Let me say a harsh truth:
Most traders do not fail due to poor skills, but rather die in the obsession of 'going against the trend'.
When the market rises, many people feel that 'it has risen too much and should fall'. When the market falls, they think 'it can't fall anymore and should rebound'. While they speak of following the trend, their actions are in contradiction, directly turning trading into a gambling game against the market.
And what was the result? The trend continues, and the account is consumed. Losses do not stem from misunderstanding the market but rather from knowing the direction yet still desiring the thrill of 'snatching a turning point'. Winning once leads to addiction; losing once leads to total defeat.
Moreover, this 'counter-trend impulse' does not occur occasionally; it is a 'tumor' in the minds of many traders. It is enticing but deadly.
In today’s article, I will clearly explain the following four points.
1. Human nature analysis: Why can’t we help but 'catch the bottom and touch the top'?
2. Risk analysis: How deadly is counter-trend trading?
3. Core insights: How to judge a 'true reversal'? Three major judgment standards.
4. Practical suggestions: Three bottom lines that must be adhered to.
If you have ever struggled in the vicious cycle of 'seeing the right direction but losing money', then this article may be a turning point on your trading journey.
This article is full of valuable insights. I recommend saving and reading it. If you gain something, remember to give it a thumbs up. Thank you.
1. Human nature analysis: Why can’t we help but 'catch the bottom and touch the top'?
It primarily stems from our instinct of greed.
Traders often have an anchoring bias; for example, if the price was once 1000 and now has dropped to 700, they feel it is very cheap and should buy.
Not buying due to the fear of missing out on profit opportunities, regardless of whether the fundamentals change, whether the candlestick pattern is still accelerating, or whether the technical indicators resonate with reversals, thinking 'it has risen too much and should fall' follows the same reasoning.
Doing this is not rational; it is merely a psychological reference to past prices and the mindset of 'picking up bargains'.
Next is the survivor bias.
Since childhood, we have heard various legends of heroes, providing motivation and the impulse to imitate, making us feel that if they can do it, so can we.
Successful and profitable trading stories are the same; they also carry emotional value and are particularly inspiring, especially when feeling lost after a loss. Such stories can give us great hope.
Moreover, most of these trading masters operate by guessing tops and bottoms, which gives us the illusion that as long as we catch the bottom once, we can recover our losses.
In fact, trading masters only account for a tiny fraction among traders. Many who come down from the altar end up in miserable situations, but remain unknown.
You can search for Fu Xiaojun, Hou Qinghua, Xiaoyao Liuqiang, and Chen Shuqiang to see that there are many failed masters as well.
There is also a misalignment of cognition.
Misunderstanding a normal 'pullback' as a 'reversal'. Many people say trading should follow the 'direction', which is correct, but the direction operates in a structural way, and very few people pay attention to this point.
We have all learned that price rises operate in an 'N' wave structure of rising and falling. The market cannot move all the way down in one breath; it needs time to breathe. It is inevitable and normal for there to be pullbacks during an uptrend. Do not think of a reversal at the first sign of a pullback.
2. Risk analysis: How deadly is counter-trend trading?
It is not a 'mistake', but a 'collapse'.
The inertia of trends is too strong for ordinary people to stop.
The formation of trends is the result of billions of dollars choosing the same direction; it is not decided by a single person but is a market consensus.
Just like a flood, the more participants involved, the stronger the trend becomes, and the harder it is to end. Moreover, the end of a trend usually involves common bottom oscillations. Trying to stop the inertia of the trend with just one person's strength will only lead to severe setbacks.
The correct approach is to be like a blade of grass; the trend is the wind, and I am the grass. Wherever the wind blows, I will lean.
If we are trading futures or forex, we are engaging in leveraged trading. Once we use leverage in a trending market, it will accelerate the risk.
Leverage is borrowing money to trade; with a capital of 10,000, you can place an order of 100,000.
Leverage trading faces three issues.
(1) Once a mistake is made, the leverage amplifies the loss, posing a risk of forced liquidation.
(2) It is easier to make small profits and incur large losses.
For example, in forex, with a 10,000 USD account, using 10x leverage can allow you to trade 1 lot of EUR/USD. If the market makes a small swing, you can earn hundreds or even thousands of dollars (which is several thousand RMB).
In reality, most people think that a few thousand can accomplish many things, and once it is not much, it is worth closing the position, leading to more impulsive closings. This prevents making big money and achieving a good profit-loss ratio. But do not forget that when losing, it is also leveraged 10 times, leading to significant losses.
(3) Psychological pressure can be magnified exponentially; the leverage of funds is also a leverage of emotions. The drastic changes in profits and losses can make people short-sighted, impulsive, and trade more frequently.
Any mistake made under leveraged trading accelerates the process of collapse.
4. Practical suggestions: You must adhere to three bottom lines.
First, you must trade with light positions to test the waters.
Grasp a strict risk control standard (≤5%), and the risk control standard for a single trade must be less than 5% of the principal. Of course, there is a big premise: you must have a complete trading system that guarantees a certain success rate and profit-loss ratio.
Secondly, there must be a clear stop-loss and strict execution of your trading strategy.
"Finding reversals" is a more counter-trend approach; stop-loss is key in 'counter-trend' trading. Only by executing stop-loss properly can one achieve overall profitability. Otherwise, even if you make the right trades ten times, a single trade without a stop-loss can nullify all profits and even lead to a total loss. Therefore, before entering an order, there must be a clear stop-loss.
Additionally, wait for 'reversal confirmation' before taking action.
Returning to the fundamentals of trading, every transaction should have reasonable technical standards before opening a position. 'Counter-trend' trades are no exception; they must have technical standards for reversal confirmation to enter against the trend.
For example, when the structure is broken, trading volume changes, divergence signals resonate, and market sentiment is exuberant, etc.
"Anyone can open a position, but only a few can wait for the signal and then open a position."
Counter-trend trading is not impossible, but it must never be stubbornly resisted.
There is no market that only rises and never falls; the market will always have turning points. If you can anticipate and reasonably grasp the turning points, you can achieve excess profits, but you must promptly acknowledge mistakes and cut losses when wrong. Trading is about probabilities, not obsessions.
Never stubbornly resist; leave yourself the opportunity to correct and turn things around. The trend is immensely powerful, just as we cannot go against the flow on a highway. Following the rules and accelerating appropriately is the wise choice.
