Can Countertrend Trading Make 50% Per Year?

I was born a countertrend trader.

Or, more to the point, my trading life began with total belief in countertrend trading.

The books I read were countertrend in nature and the trades I took were countertrend in action. I believed that countertrend trading was the best (and only) way to trade.

While I no longer believe in countertrend's exclusive dominance, trading against the trend back to fair value is still near and dear to my heart. It's probably my favorite way to trade.

If you're a countertrend trader, you have a few things going for you. One, you're taking part in the universal law of "reverting to the mean," which is irrefutable. What goes up must come down. Winning streaks are followed by losing streaks. Nothing lasts forever, and when it stops, where does it go? Back to the mean.

Being a countertrend trader means you are trading in a way that utilizes principles that will be true forever. So I got that going for me. Which is nice.

Two, you get the added benefit of being right. Nothing is more exquisite than making a bold prediction that comes true.  A countertrend trader is basically saying, "The world is wrong. I am right." And then you get to be right. Pretty satisfying.

The problem with countertrend trading occurs when it doesn't go the way you want.

What goes up does have to come down, but it doesn't have to come down when you want it to. It can go up and up and up before it ever decides to come down, and it's not fun to be on that ride when it happens.

Plus, when you tell the world it's wrong and you're the one who's wrong, you feel like an idiot. Um, why did I short Apple again?? The psychological pain of being wrong when everyone else is right is considerable.

Nonetheless, I'll always have a fondness for countertrend trading.

A while ago, I did a Course that had three different countertrend trading systems.  One of those used Weekly Pivot Points.

As a super quick review, Weekly Pivot Points have been used by traders for about 100 years. Pivot Points represent the "fair value" for a financial instrument on a weekly basis. If price gets too far away from its Weekly Pivot Point, it is likely that we will see a reversion back toward fair value. I learned about the power of Pivot Points from Rob Booker in 2009, and I built a robotic trading system using those principles for my Course. Those robots were built to trade on the Tradestation platform.

The problem is that I didn't quite build them right.

Those Tradestation Weekly Pivot robots were programmed to only enter trades at the close of a bar. At the time, my programmer told me that it would be very expensive to build "intra-bar" robots that got into trades at exactly the moment I wanted to, and I thought that it wouldn't make a big difference anyway.

I was wrong. Way wrong.

A short time ago, I had these same robots built for MT4. This time, I did not wait for the close of the bar. This time, the robots got in at exactly the point I desired. That made a huge difference.

This week, I put together a portfolio of Weekly Pivot robots to see how a few different currency pairs would work together in countertrend harmony.

But I wanted more than that. I wanted to see how aggressive the Weekly Pivots could be and how much they could hypothetically make.

Let's take a look.

By trading four currency pairs (EURUSD, GBPUSD, GBPCHF, USDJPY) at an aggressively high trading size on a hypothetical $10,000 trading account, this countertrend quartet did quite well.

Here are ten year-end totals for the portfolio of four:

  • 2007 $10,265
  • 2008 $21,034
  • 2009 $8,532
  • 2010 $13,034
  • 2011 $14,631
  • 2012 $12,231
  • 2013 $2,417
  • 2014 $5,553
  • 2015 $8,674
  • 2016 -$468
  • 2017 $3,622

That's pretty impressive. With no compounding, this portfolio hypothetically averages $9,047 per year over the past decade. Again, with no compounding, that's 90% per year! Of course, there was one losing year in 2016, but it's already bounced back in 2017. Plus, it was only a small loss.

As we talked about, though, when the trend is pounding against you, it can be some rough sledding.

Take for example, 2013. It's profitable for the year, but there was a massive trend uprising between May and September of that year. Trades would enter and trades would immediately run away from the Weekly Pivot. When you put all the trades on a spreadsheet and total up the maximum damage to our hypothetical account, it comes out to $10,548. That's a big number (and it's also the worst drawdown of all the years).

Putting the math together, it turns out it's not possible to trade this system at this trade size on a $10,000 account. You could lower the trade sizes, but let's stick with this example.

To accommodate for that maximum drawdown, let's say we trade it on a $15,000 account. That's incredibly aggressive but let's just say we're crazy people. If we did that, $9,047 per year on a $15k account is 60.3%.

So, yes, countertrend trading can make over 50% per year hypothetically, but that's only if you can handle big drawdowns.

There is one other problem.

This data is from MT4 only. While I do everything I can to make my MT4 testing accurate, I don't have Tradestation to back me up. While my Tradestation testing and MT4 testing are very similar most of the time, I can't confirm this data with Tradestation. But anyone could run their own tests on the data to double-check.

Assuming the data is as solid as we'd like it to be, let's take a final look at lowering the risk. Let's trade this portfolio on a $20,000 account. That lowers our one-time max drawdown to about 50%, which lowers our average return percentage down to about 45% per year. If we're even more risk averse, we could trade it on a $30,000 account, which would lower our max drawdown to 33% and our average percentage return since 2007 to 30.1%.

That's still really good.

The bottom line: Countertrend trading can make monumental returns if you're willing to take big drawdowns. If not, countertrend trading is can still perform quite well.

I'm going to do a new video on this portfolio next week for the original Course ("How To Make 50% Per Year (On Purpose"). I'll post the video inside the Course and attach the MT4 robot.

That means if you're already a member of that course, you'll get the new MT4 robot for free. If you want to join now, those robots will be included at no additional cost once the video is posted next week.

[Lifetime Members will get access to the Course and therefore can also get the robots.]

The bottom line: Countertrend trading is a philosophically sound, satisfying, and scary way to trade. But it can produce good results.

Just ask Warren Buffett.

[note: this post was updated on 3/6/17]

The "How To Make 50% Per Year Course (with free Weekly Pivot robot)" is here: https://www.kajabinext.com/marketplace/courses/3099-how-to-make-50-per-year-on-purpose

My new Fair Value Course here: https://www.kajabinext.com/marketplace/courses/5520-the-high-percentage-fair-value-system

For info on my other Robot Course, go here: https://www.scottwelsh.me/courses-ebooks/