For FX traders, a common question is whether contrarian or trend-following strategies are superior.
As an EA developer, I’ll conclude which is more advantageous.
First, let’s discuss the tendencies of contrarian and trend-following strategies during Tokyo, European (London), and New York trading hours.
During Tokyo hours, markets tend to range, making contrarian strategies more favorable.
From early morning in Japan until around 7 AM MT4 server time, when European traders begin to participate, contrarian strategies have an edge.
Next, we’ll consider the period when European traders start participating, the London market opens, and then the New York market opens.
Volatility increases from around 8 AM MT4 server time when European traders start to join.
Price movements peak around the New York open, around 4 PM server time.
After that, with the release of U.S. economic indicators and until the London fixing, volatility remains high.
The London fixing refers to the time the London market closes, at 4 PM London time, or 6 PM server time.
After the London fixing, with only New York driving the market, price movements become more subdued.
Therefore, from the time Europeans start participating until the London market closes around 6 PM server time, trend-following strategies are advantageous.
When the European, London, and New York markets are open, the market tends to form strong trends, favoring trend-following strategies.
Next, let’s examine the differences between years of high and low volatility.
We’ll thoroughly compare the tendencies of contrarian and trend-following strategies based on the results of MT4 EA backtests and forward tests.
Contrarian vs. Trend Following: Strategy Breakdown
Contrarian strategies involve entering trades against the trend direction, aiming to profit from trend reversals.
These strategies enter trades at reversal points identified by support/resistance levels or oscillators like RSI that indicate overbought or oversold conditions.
One of my contrarian EAs is “Reversal Seven,” which uses technical indicators for its contrarian strategy.
Trend-following strategies involve entering trades in the direction of the trend, aiming to profit from trend continuation.
These strategies determine trends using tools like trend lines, range breaks, moving averages, and Bollinger Bands.
“Breakout Trading” is my EA that employs a range breakout strategy.
This EA targets breakouts during London and New York trading hours because the performance is better during these times.
Backtesting reveals that this EA doesn’t perform well during Tokyo hours but profits during the highest volatility periods, the London and New York sessions.
Additionally, I’ve developed a multi-logic EA that switches between contrarian and trend-following strategies based on the time of day.
“Hybrid EA Trade” is a hybrid EA that uses contrarian strategies during Tokyo hours and trend-following strategies during European and London hours.
It capitalizes on trend-following during high volatility and contrarian trading during low volatility periods.
It trades contrarian from 11 PM to 5 AM server time and switches to trend-following after 5 AM.
By looking at the EA backtests and forward results, you can see that contrarian strategies work best in the Japanese market, while trend-following strategies perform better in the European, London, and New York markets.
Finally, let’s consider the differences between years with high and low volatility.
Simply comparing the periods when trend-following EAs like “PerfectOrder” and “GoldenCross” are profitable with when contrarian EAs perform well reveals the answer.
Trend-following EAs can significantly increase assets during high volatility periods, such as the 2008 financial crisis or post-2020 COVID-19 market conditions.
Conversely, trend-following EAs struggle to profit during low volatility periods.
Contrarily, contrarian EAs struggle in high volatility markets and have not performed well since 2020.
I started developing EAs in 2020.
Many of my early EAs listed on GogoJungle were contrarian and most showed negative forward results.
Due to the current market conditions, these EAs have been withdrawn from live trading.
If the market stabilizes in the future, they might start winning, but as long as high volatility continues, they won’t perform well.
However, contrarian EAs that scalp in the morning or trade only during favorable times may still succeed in the current market.