Most of you being a trader, it is all about knowing at the first place what type of trader you are? There is more than one thought when it comes to trade in the stock market. For example, as a trader, you might have to choose between intraday trading, scalping, positional trading, or long-term investing. Similarly, you might also be thinking about trading the trend or the reversal. So many amateur traders always have one question in their mind – who succeeds – trend trader or reversal trader? In today’s blog, we will be shining light upon what has more hit rate – trend trading or reversal trading, or both…?!!
But before we find out what’s best, let’s understand precisely the meaning of trend trading and reversal trading.
What Is Trend Trading?
They always say – trend is your friend. To tell about Trend trading in simple words – it is going with the flow. If any stock is in its bullish phase, then the market keeps buying it on dips. Similarly, when it enters into a bearish phase, it gets the treatment “sell on rise.”
Above, you can see the daily chart of IRCTC. Here, you can see that the stock is in an uptrend, and a trend trader would treat IRCTC as a buy on dips stock. IRCTC has been respecting this trendline, and whenever it comes near its supply zone, it shoots up another 3% to 5%. Pyramiding over this, one would have made good money.
Now, before we can discuss who succeeds when it comes to trend trading or reversal trading, first we need to know about the advantages of trend trading:
– There are always more opportunities to take a trade because trends give you multiple chances.
– A trend has a high probability of spanning out because a trend always has momentum on its side. A trend gives you a higher frequency of trade opportunities and more confirmed trades.
Cautions While Trend Trading:
Although trend trading is considered a safer bet as against reversal trading, here are some cautions that you need to keep in mind:
– Maintain a healthy stop-loss, in the case of the above chart, maintain a stop-loss beneath this trendline considering the base support breach.
Trend trading makes your trades possible with an excellent risk-reward ratio of about 1:5 or even more, 1:7.
– If you want to succeed in trend trading, you need to leave your emotions out of the door. Once the trend is broken, don’t hope for some magic that will continue the trend.
What Is Reversal Trading?
Reversal trading, as the name suggests, is trading the reversal of any trend. A trend trader finds an opportunity when an uptrend turns into a downtrend or vice versa. As our trading mentor at TCI, Chinmay says – a reversal trader is deep down a trend trader only, who identifies the trend at its very prenatal stage. To be honest, reversal trading is where fortune can be made if at all, one knows how to trade the reversals perfectly…!!
Below, you can see the daily chart of Nifty 50. When the Indian and the Global Markets were hit with the “Pandemic” news, they started displaying a bearish trend on charts.
You can see that after falling almost forty percent or even more, a Doji was formed, which is mostly considered as the first sign of reversal. On the next day, a green engulfing candle was formed. This confirmed the reversal of the trend. Now a reversal trader would enter the scrip, either in futures or in options, and ride the trend as long as possible. Reversal traders find opportunities looking at factors like Dojis, Morning Stars, or RSI Divergence.
Can you imagine if one would have entered the Nifty Futures at sub 7,500 levels? And they would have ridden the trend till CMP. They would’ve made a fortune in their lifetime.
It’s an art to become a reversal trader as they can easily take the trend trades too. As they tend to take the reversal trades considering the Maximum gains from the market, they don’t leave the trend trade besides. In order to be in the trending trades, they use different Time Frame Analyses to enter the sweet spot of the market.
If we consider it from the sidelines, trend trading and reversal trading are two faces of one coin. The thing is – traders make BIG money while trading reversals, but they make consistent money while trading with the trend.
Cautions While Reversal Trading
However, making big money is possible while trading a reversal, but there are some cautions that you need to take care of while trading them:
– One needs to patiently wait to sniper shot the reversal setup properly as markets are very dynamic, one should have a sound knowledge to enter the trade using multi time frame analysis like top down approach to enter at the right time.
– There can be multiple fakeouts while one searches for reversals. One needs to be pro in finding the right reverse to avoid stop loss hunting.
Who Succeeds – Trend Trader Or Reversal Trader?
Comparing both, the hit rate of trend trading is higher than that of reversal trading, at the same time, the reward of reversal trading is much higher than that of trend trading. The reversal trader has an upper edge over the trend trader but to reach the peak of successful reversal trades it requires a lot of discipline and patience to make one proper reversal setup. The thing is, only that trader can succeed who has the ultimate respect for Mr. Market, their system, and their stop-loss.
As retail traders, we need to understand and abide by the following points:
– Emotions have no place in trading. Anyone (trend trader or reversal trader) can fail if greed, fear, or overwhelming joy grip them.
– A trader who can humbly accept their stop-loss and lessons from the market without revenge trading will always succeed – whether it’s trend trading or reversal trading.
– A trader, no matter trading a trend or a reversal, who knows the price action and data playout like the back of their hand has a higher chance of success in the market.
In the end, it all boils down to the fact that trading the right way matters the most. Do you want to trade the right way? Then take a good time for learning…!! Because you can succeed with a defined setup and tool – so let it be trend trading, reversal trading, scalping, day trading, or even long-term investment if you have the correct command over Price Action and Data, You can make it.