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How To Make Good Money In Bad Markets - Part 3
Buying Counter-Trend Bounces for Short-Term Profits.

The overall success rate of any approach depends to some degree on your personal trading preferences and skills. For example, if you already use a bounce entry method such as the RightLine Bullish-Bounce for market up-trends, you can easily modify it to work during market down- trends too.

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You do this by buying stocks during counter trends, which are waves of short-term up-trends that occur within the context of an overall down- trending market environment. Since the market trend is down, the counter-trend method takes the advantage of the brief periods of bullish relief that occur during all declining markets.

It is best suited for traders with the experience and discipline to use a strict exit strategy designed for very short-term trading. This means using tighter trailing stops than you would normally use when trading with the trend instead of against it.

How To Anticipate A Counter-Trend Bounce

It's important to note that counter trends don't occur randomly. These brief reversals usually take place at price support levels, such as popular moving averages like the 50 MA, or previous highs or lows. This information gives you a huge edge by letting you anticipate and prepare for "bounces" that most investors aren't expecting.

The mechanics of trading counter-trend bounces against the primary market trend are very similar to trading bounces that are in the same direction as the primary trend. The main difference between the two strategies is that counter trend bounces are typically faster and smaller than bounces in the same direction as the trend.

Here's a brief tutorial on how to trade a bounce, regardless of whether it in the direction of the primary trend or not:

Trading A Bounce

A "bounce" occurs whenever price drops to a support level, then reverses and proceeds higher. There should always be two basic components in place before you enter a bounce trade, or for that matter, any trade. We refer to the first one as The Setup, and the second as The Trigger.

The Setup:The Setup is a specific condition or set of conditions that must be met before you will even consider entering a position. The second component is the Trigger. A Trigger is the specific signal that tells you exactly when to enter.

The conditions for Setups vary, depending on the type of trade and the chosen timeframe. Here is an example of a simple yet effective Setup that might be used for a bounce play on a daily chart. Though it doesn't include all of the possible criteria that could be included in a setup, it will give you a good sense of what a solid setup should include.

Here is an example of a simple bounce Setup: "Price drops from previous level to within 1-percent of the 22 EMA (Exponential Moving Average), then reverses to close above the session low by at least 25 percent of the intraday price range."

Notice that the Setup defines the conditions very specifically. A careful review of successful bounce plays reveals common traits. The best way to "know" if a bounce is underway is to set up reasonable conditions to define the early stages of a reversal. This doesn't guarantee that a reversal will always continue far enough in a profitable direction to make the trade worthwhile. However, it does increase the odds that a genuine bounce is about to occur.

So when do we know to get in? We use a Trigger.

The Trigger: The purpose of a Trigger is to confirm that price is still moving in the proper direction once the conditions are met. Just as with a Setup, the criteria for an entry Trigger will vary.

Here's an example of a simple Trigger for the bounce Setup: "Buy shares when price rises 0.15 above the high of the Set-up session."

While each trader may prefer to use their own set of conditions for the Setup and Trigger, it's very important that the rules for both are very precise. This allows you to track the effectiveness of your methods and make adjustments whenever needed - an important process when adapting to ever-changing markets.

Here are three guidelines you should always follow:

1) A bounce setup should be specific enough to leave no doubt that a rebound is likely to occur once the conditions are met.

2) Regardless of the specifics for each Set-up and Trigger, the Trigger should always confirm the price direction that is indicated by the Set-Up. This obligates price to clearly move in the intended direction before a position is entered, usually beyond a resistance level such as the high or opening price.

3) Only change or revise the conditions after careful evaluation.


Bottom Line:
Counter-Trend Trading is clearly a powerful method to use whenever the major indices are spiraling downward. When combined with Shorting tactics that use proven techniques such as the Bearish U-Turn and our Risk Control System, you have a solid strategy in place for trading profitably in bad market conditions.

As you know, locating these types of high quality trades normally takes hours of searching through charts and other data. Fortunately the RightLine Report replaces all of that brain-numbing work with easy-to-use trade setups you can quickly execute with your broker. This approach can literally reduce your trading time to just a few minutes a day.

Trade well!


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>> Part 1 -- How To Make Money In Bad Markets >>
>> Part 2 -- The Bearish U-Turn: An Effective Entry-Tactic for Shorting Stocks >>