Is Counter Trend Trading Worth It?

Counter trend trading by definition is trading against the trend. But is bottom picking or top picking really worth it?

“The trend is your friend until the end” that is a pretty famous saying, but not everyone agrees with it. It does sound more profitable to try to find out when a trend is on its last leg and jump in right in before it turns around.

But that is a false idea; let us look at this stock GRMN which has gone from $120 to $44. Such a large drop in price on such a good company has to mean that it will pop up right? Wrong, just because a stock has been trending for a while does not mean it will suddenly stop.

In fact a trend is more likely to continue then it is to suddenly stop. Even if we were right and this was the bottom, a stock does not just make a U turn and start going up. They normally take many months or even years of trending sideways before they start trending the other way.

Let us say that we did try to bottom pick this stock. Less than 4 months later it was trading at $14.4 a 67.2% loss. If on the other hand we decided just to follow the trend and not to try and bottom pick it we would have made a 67.2% gain in the same period.

So does this mean that you should never trade against the trend? Not necessarily, but if you do realize that you are betting against the odds and keep your losses small.

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