Countertrend Trading—Divergence, Saturation, and Exhaustion
Trying to profit from countertrend moves is an entirely different task from riding the profit wave that a long-term directional trend can generate.
Countertrend moves tend to occur at tops and bottoms, and often occur as sharp, swift, corrective moves against the grain of a previously dominant trend.
Within any trend, there are many swings and there are numerous times that the market will ebb and flow. I am not talking about, nor am I interested in, capturing the many mini-countertrend moves that occur frequently within a longer-term trend.
I am interested in the violent trend reversal countertrend moves that most often mark significant tops and bottoms, or significant secular corrections. I am interested in being short the gold market during a setup similar to that of February 1980, when the market plummeted from above $670 to below $500 in a month.
First and foremost, taking countertrend (some might call it top or bottom picking) positions should be executed in tandem with a significantly smaller degree of risk than would be considered acceptable in a trend-following campaign. Because countertrend trading, by nature, is riskier, smaller positions should be taken. It is worth stressing that countertrend trading is just that, trading—not investing.
I would strenuously advise long-term investors avoid taking risk exposure in a countertrend scenario. Long-term investors seek to profit from a trend.
This is partly ...

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