For the most part, becoming a trader entails first determining what style of trader you are. When it comes to stock market trading, there are several options. As a trader, you may have to select between intraday trading, scalping, positional trading, and long-term investing, for example. You can be considering trading the trend or the reversal as well. So many inexperienced traders have the same question: who wins: trend traders or reversal traders? In today’s blog, we’ll look at which has a higher success rate: trend trading or reversal trading, or both…?
But before we figure out which method is the best, let’s define trend trading and reversal trading.
What Is Trend Trading and How Does It Work?
The old adage goes, “Trend is your friend.” To put it another way, trend trading is simply going with the flow. When a stock is in a bullish phase, the market continues to buy it on dips. Similarly, when it enters a bearish phase, it receives the “sell on rise” approach.
The daily chart of IRCTC is seen above. The stock is in an uptrend, and a trend trader would consider IRCTC a buy on dips stock. IRCTC has been following this trendline, and anytime it gets close to its supply zone, it jumps another 3% to 5%. One may have made a lot of money by pyramiding this.
Now, before we can analyse who succeeds in trend trading or reversal trading, we must first understand the benefits of trend trading:
- Because trends provide you several chances, there are always more opportunities to take a trade.
- Because a trend always has momentum on its side, it has a good chance of stretching out. A trend will provide you with more trade opportunities and more confirmed deals.
When it comes to trend trading, there are a few things to keep in mind.
Although trend trading is thought to be a safer option than reversal trading, there are a few things to bear in mind:
• Maintain a healthy stop-loss, in the case of the chart above, a stop-loss below this trendline due to the breakdown of the base support.
Trend trading allows you to trade with a risk-reward ratio of around 1:5 or even higher, 1:7.
– If you want to be successful at trend trading, you must put your emotions aside. Don’t expect some sort of wizardry to restore the trend once it’s been broken.
What Is Reversal Trading and How Does It Work?
Trading the reversal of any trend is what reversal trading is all about. When an uptrend turns into a downturn or vice versa, a trend trader sees an opportunity. As Chinmay, our trading instructor at TCI, puts it, a reversal trader is essentially a trend trader who detects the trend at its earliest stages. To be honest, reversal trading is where you can make a fortune if you’re lucky.
The daily chart of the Nifty 50 is shown below. When the “Pandemic” news struck the Indian and global markets, they began to show a bearish trend on the charts.
You can see that after plunging about 40% or more, a Doji developed, which is commonly seen as the first indicator of reversal. The following day, a green engulfing candle appeared. This proved the trend’s reversal. A reverse trader would now enter the scrip, either through futures or options, and ride the trend for as long as feasible. Dojis, Morning Stars, and RSI Divergence are all indicators that reversal traders use to discover opportunities.
Consider what would have happened if one had bought Nifty Futures at levels below 7,500. They would have followed the trend till CMP. In their lives, they would have made a fortune.
Being a reversal trader is an art, since they can easily take trend trades as well. They don’t leave the trend trade aside because they prefer to do reversal trades in order to maximise their profits from the market. They employ several Time Frame Analyses to enter the sweet spot of the market in order to participate in trending trades.
When viewed from the outside, trend and reversal trading are two sides of the same coin. The issue is, traders earn a lot of money when they trade reversals, but they also make a lot of money when they trade with the trend.
When it comes to reversal trading, there are a few things to keep in mind.
Trading a reversal, on the other hand, has the potential to make you a lot of money, but there are several things to keep in mind:
- Because markets are very dynamic, one must wait patiently to sniper shot the reversal setup effectively. One must have a solid understanding of multi time frame analysis, such as a top down technique, to enter the trade at the perfect time.
- While looking for reversals, there may be several fakeouts. To avoid stop loss hunting, one must be an expert at locating the correct reverse.
Trend Traders Or Reversal Traders: Who Wins?
When comparing the two, trend trading has a higher hit percentage than reverse trading, but the reward of reversal trading is significantly bigger than trend trading. The reverse trader has an advantage over the trend trader, but making one correct reversal setup takes a lot of discipline and patience to achieve the pinnacle of winning reversal trades. The truth is that only those traders who have complete respect for Mr. Market, their strategy, and their stop-loss can succeed.
As retail dealers, we must be aware of and observe the following guidelines:
- Emotions are unwelcome in the trading world. If greed, anxiety, or overpowering joy grab them, anyone (trend trader or reversal trader) can fail.
– Whether trend trading or reversal trading, a trader who can humbly accept their stop-loss and market teachings without retaliating will always prosper.
- A trader who knows the price action and data playout like the back of their hand, whether trading a trend or a reversal, has a better chance of success in the market.
In the end, it all comes down to the reality that trading correctly is the most important factor. Do you want to learn how to trade properly? Then set aside some time to learn…!! Because a defined setup and instrument can help you succeed – whether it’s trend trading, reversal trading, scalping, day trading, or even long-term investment. You can make it if you have a good understanding of price action and data.