The general goal of a Contrarian Trader is to buy under-performing assets and to sell over-performing assets.
What is the Contrarian Trading?
Contrarian Trading means betting on the opposite side of the prevailing market trend. A contrarian trader is based on the belief that the mass is usually wrong about how the market is going to perform. In other words, he claims that the majority of traders tend to buy the market at its peak or to sell the market at its bottom. For all those experienced with trading, this is not far from reality.
What is the goal of a Contrarian Trader?
The general goal of a Contrarian Trader is to buy underperforming assets and to sell over-performing assets. Given neutral news most of the times the under-performing assets will go up and the over-performing assets will go down.
Contrarian Strategy and Forex Trading
When a trader opens a long/short position in the Forex market forecasts that more traders will be tempted to open positions in the same direction in the near future. But the market is not driven by retail traders it is driven by major institutional traders. Retail traders tend to open positions that are not followed by institutional traders. Institutional traders tend to trade against the masses. So the key for a contrarian trader is to think like an institutional player, not a retail one. But let’s see a broader approach to the contrarian strategy.
Going the other Way of the Diminishing Demand
If most market participants believe that the price of an asset will rise then they already bought that asset. At a certain point, the demand equals the supply. After that point, the demand is diminishing while the supply remains stable so the price of this asset will consequently fell. This situation is particularly true after a news release. Contrarian traders are using a wide selection of market sentiment indicators to define how the mass is trading. Below in this article, you can find a list of market sentiment tools and indicators.
The Human Psychology
Our human nature is based on prehistoric instincts, fear and greed are two of them. Traders have the tendency to become greed at the peak of the market and to be feared close to the market’s bottom.
◙ Buy when other traders are feeling fear and sell when other traders are greed
Baron Rothschild sometime said "The time to buy is when there's blood in the streets".
Trading the Foreign Exchange means buying a currency and at the same selling another. There are hundreds of reasons for a currency to appreciate or to depreciate against another currency. In this truly complex and dynamic trading environment these are some important tips for all Forex traders.
Finding the right partners when trading Forex (brokers, signal providers etc) will make the difference in your future trading performance. Don’t be in a rush to open a trading account. Review your potential partners, using the web (Google Search, Forex Peace Army etc). When you have come up with 2-3 good choices then start asking questions using the Live Chat service. Learn everything about your potential partners before depositing any money.
An easy way to evaluate a Forex Broker is to use the ratings of TradingCenter.org (Forex Rating Formula v4).
When you trade any financial market one of the first things that you should do is to seek and to apply a trading strategy. Any chosen trading strategy must be oriented to your trading style, to your risk profile, and to your personality. There are several different Forex Trading styles and a great variety of strategies for each style.
■ Scalping Strategies
■ Day-Trading Strategies
■ News-Trading Strategies
■ Swing-Trading Strategies
If you apply a manual trading strategy it is very important to apply it in the right timeframe. For example, if you implement a day-trading strategy using the popular RSI tool, you can select the M5 (5-minute) timeframe (30-70 levels). On the other hand, if you implement a Swing-Trading strategy based on MACD you can’t select the M5 timeframe, you must select the M30, H1, H4 or D1 timeframe. If you apply MACD on a M5 chart the results will mislead you and any good performance will just be the outcome of simple luck.
Before anything else make sure your strategy is effective by using it in a Demo Account. Usually, the trading conditions (requotes, slippage etc) in Demo Accounts are better than in Real Accounts, therefore if a strategy proves unsuccessful in a Demo Account doesn’t have a chance to prove successful in a Real Account.
If you decide to use an Automated-Trading Strategy then you can apply Historic Back-Testing. You may backtest a strategy using any trading platform, for example, MetaTrader-4. It is better to conduct historic back tests across many different time periods in varying market conditions in order to be sure that it is really effective.