MT4 EA showdown! Counter-trend vs. Trend-following Which one wins? [EA Developer Answer]

For FX traders, there is a question: which is superior, contrarian (counter-trend) or trend-following (following the trend)?

From the perspective of an EA developer, I will explain the merits and demerits of each and draw a conclusion on which is more advantageous.

First, I will describe the tendencies of trend-following and contrarian trading during Tokyo time, European/London time, and NY time.

Tokyo time tends to be range-bound, so contrarian trading is advantageous.

Is it a coincidence that there are many Japanese contrarian traders?

Or is it a matter of national character?

Setting aside the reasons, from early Tokyo morning until around 2:00 PM Tokyo time when European participants start to join, contrarian trading is favorable.

Next, I consider the period when Europe begins participating, the opening of the London market, and then the opening of the NY market.

From around the early evening in Tokyo time when Europe starts to participate, volatility expands, and price movement peaks around 9:00–10:00 PM Tokyo time when NY opens.

Thereafter, with a succession of US economic indicators, price action remains volatile until the London fix is completed.

The London Fix refers to the exchange rate determined when the London market closes; it is the UK version of the Tokyo “interbank” rate.

It is the exchange rate determined at 4:00 PM London time. In Japanese time (DST) it is 24:00, and (standard time) it is 1:00.

After the London Fix, since NY leads the market on its own, price movement becomes more subdued.

In other words, the period from around 2:00 PM Tokyo time when Europe starts to participate until around 1:00 AM Tokyo time when the London market closes is favorable for trend-following.

The following reasons suggest that trend-following is favorable.

When Europe begins to participate and the market experiences a strong trend, contrarian traders who go against the trend are at a disadvantage, while trend-following traders have an edge.

This is why it is said that Japanese traders tend to be contrarian, while overseas traders tend to be trend-followers.

In other words, during the market hours when Europe, London, and NY are open, the market is thought to be in a phase where trends form strongly, so trend-following is more likely to win.

There are claims that the Japanese market favors contrarian trading while the European/London/NY markets favor trend-following, but is there solid backing for this?

Also, do there differ in high-volatility years versus low-volatility years?

To answer these questions, I thoroughly compare the tendencies of contrarian and trend-following strategies derived from MT4 EA backtests and forward tests.

Contrarian vs trend-following: explanation of each logic

Contrarian strategy

Enter in the opposite direction of the trend and aim to profit from a trend reversal.

■ Entry points

・Target reversals after touching horizontal lines or support/resistance lines.

・Use oscillators like RSI to gauge overbought/oversold conditions and time reversals.

・Take positions opposite to the price when the Bollinger Band sigma is touched.

We coded such contrarian methods into an EA and ran dozens to hundreds of backtests; the resulting EA is called “Reversal Seven.”

Reversal Seven product page

Among Reversal Seven’s logics, the two below are contrarian strategies that use technical indicators.

No.3. IchimokuSignalTrade (Ichimoku Signals Trade)

It moves from 18:00 MT4 server time to 05:59 the next day.

Trading decisions are based on the Ichimoku Cloud’s turning line, base line, and candles.

When the turning line crosses from below the base line to above it (golden cross achieved), take a contrarian short position,

When the turning line crosses from above the base line to below it (dead cross achieved), take a contrarian long position.

No.4. BollingerBand

It moves from 22:00 MT4 server time to 00:59 the next day.

It moves in the early Japanese morning.

Trades are executed by detecting reversals from Bollinger Bands ±2σ and candles.

In addition to the above two, there is also an early-morning scalping EA logic built in.

No.6. MorningReversal

It moves from 22:00 MT4 server time to 02:59 the next day.

An early-morning scalping-type EA operating in the Japanese morning.

The logic is a contrarian strategy using Bollinger Bands targeting the early morning in Japan.

A common feature of the above three logics is that they trade contrarian during Japan’s late night to around noon local time.

As shown by the results above, it is concluded that the Japanese market favors contrarian trading.

Trend-following strategy

Enter in the direction of the trend and aim to increase profits as the trend continues.

■ Entry points

・Identify uptrends or downtrends with trendlines or range breaks.

・Use indicators like moving averages to determine the trend direction.

・Use technical indicators such as Bollinger Bands to gauge trend strength.

EA whose main logic is trend-following includes “PerfectOrder_GBPJPY” and “GoldenCross_USDJPY.”

PerfectOrder_GBPJPY

GoldenCross_USDJPY

The above EAs use moving average-based logic, but there are also other EAs that target range breaks, among others.

Breakout Trading USDJPY

PerfectOrder_GBPJPY and GoldenCross_USDJPY simply use moving averages to determine the trend and enter in the trend-following direction.

They operate 24 hours a day.

Breakout Trading USDJPY targets breakouts during London and New York times.

Why does Breakout Trading USDJPY limit trading to London and New York times?

The reason is that those times yield better performance.

In other words, this is a breakout-trade aimed at the most volatile price movement window, and tests show profits aren’t achieved in Tokyo time.

Furthermore, I developed a multi-logic EA that switches contrarian and trend-following logics by time of day.

Hybrid EA Trade USDJPY

A hybrid EA that employs contrarian in the morning and trend-following during the day and night.

During the volatile daytime moves, it increases profits with trend-following, and during the low-volatility periods, it accumulates steady gains with contrarian trades.

Contrarian trades from server time 23:00 to 05:00, then follows trend mode after 05:00.

By default, the contrarian mode is active from 23:00 to 05:00 server time.

You get the idea, right?

From the EA backtests and forward results, it is clear that the Japanese market favors contrarian trading, while the European/London/NY markets favor trend-following.

In particular, contrarian-favorable times appear markedly in the Japanese morning.

An EA that leverages this property is what is known as a morning-scape EA.

Finally, I will consider differences between high-volatility years and low-volatility years.

This can be judged simply by comparing profits of trend-following EAs such as “PerfectOrder_GBPJPY” and “GoldenCross_USDJPY” during favorable periods against contrarian EAs that perform better during other periods.

Trend-following EAs can increase assets substantially in highly volatile periods.

The 2008 Lehman shock and the COVID-era market from 2020 onward, for example.

Conversely, during periods of low volatility, trend-following EAs struggle to generate profits.

On the other hand, contrarian EAs tend to struggle in highly volatile markets, and have difficulty winning since the volatility surge after 2020.

I started developing EAs in 2020.

In the early days on Gogojungle, many of the EAs were contrarian types, and most had negative forward results.

They did not suit the current market, so I stopped running them on real accounts.

If the market stabilizes in the future, they may start winning, but as long as the current high-volatility environment persists, I don’t expect them to win.

Among contrarian EAs, those that only enter during favorable morning-scape times have a chance of succeeding even in the current market.

Next time, I will consider “Anomaly-type EAs.”

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