I am a great believer of contrarian view about the market behavior. When fears engulf us and everywhere there is a feeling of pessimism, I find it work smartly. Contrarian trading is a strategy where traders go against the prevailing market sentiment and take positions that are opposite to the majority of market participants. This approach can be rewarding for traders in several ways, but it also comes with its own set of risks and challenges.
In the recent times, global markets are in the mood of correcting themselves. When Indian market, especially Nifty50 is also corrected approx 747 points from its life-time high of 19992 and reached around 23.6% Fib correction level of its total move 3164 points starting from 20th March-23, I was active.
And, I noticed that at 23.6% Fib correction, Nifty50 was continually taking support multiple times at this level and its 2-Period Connor RSI (Relative Strength Index) was also showing oversold condition, my conviction made me aware that I should go long. I went for long with a Nifty September 19200 ITM monthly Call Options with a Stop Loss 1 ATR (Average True Range) below 19200 levels. And, voila! I am still sitting on 400 points profits and exited my position today.
So, contrarian trading many a times is beneficial and here are some potential benefits of contrarian trading:
Profit from Reversals: Contrarian traders often look for overbought or oversold conditions in the market. When a stock or indices becomes extremely overbought means too many buyers or oversold mean boat load of sellers, it may be due for a reversal. Contrarian traders can profit from these reversals by taking positions in the opposite direction of the prevailing trend.
Go against Herd Mentality: Contrarian trading helps traders to go against the herd mentality that often leads to bubbles and market crashes. When everyone is greedy buyer or fear seller of a particular asset, its price may become overinflated or tanked. This situation creates an opportunity for contrarian traders to sell or buy and profit from trading.
Lower Entry Points: Contrarian traders can enter positions at more favorable prices compared to those who follow the crowd. Buying when prices are low (during pessimistic sentiment) or selling when prices are high (during euphoric sentiment) can lead to better risk-reward ratios.
Emotional Control: Contrarian trading requires discipline and emotional control. It can help traders develop a mindset that is less influenced by fear and greed, leading to more rational decision-making.
However, it's essential to recognize that contrarian trading is not without its challenges and risks:
Timing Risk: Timing is critical in contrarian trading. If a trader enters a contrarian position too early, they may experience significant drawdown before the market sentiment reverses in their favor.
False Contrarian Signals: Not every extreme market sentiment will result in a profitable contrarian trade. Sometimes, market conditions may persist longer than expected, leading to losses for contrarian traders.
Information and Analysis: Contrarian traders must have access to accurate and up-to-date information and conduct thorough analysis to identify potential reversals in sentiment. This requires a deep understanding of market dynamics and the ability to differentiate between short-term fluctuations and genuine trend reversals.
Risk Management: Like any trading strategy, contrarian trading requires effective risk management. Traders must set stop-loss orders and position sizes to limit potential losses when their contrarian trades do not go as planned.
In conclusion, contrarian trading can be beneficial for traders who have the skills, discipline, and risk management strategies to implement it effectively. It offers opportunities to profit from market sentiment extremes and can help traders avoid the pitfalls of herd behavior. However, it also comes with timing risks and the potential for false signals, so it's important to approach it with caution and a well-thought-out strategy.
FAQs
The contrarian sees buying opportunities in stocks that are currently selling for below their intrinsic value. Being a contrarian can be rewarding, but it is often a risky strategy that may take a long period of time to pay off.
What is the most profitable trading strategy of all time? ›
Three most profitable Forex trading strategies
- Scalping strategy “Bali” This strategy is quite popular, at least, you can find its description on many trading websites. ...
- Candlestick strategy “Fight the tiger” ...
- “Profit Parabolic” trading strategy based on a Moving Average.
Indicator-Based Directional Trading
This strategy uses an indicator to determine the direction of the trade. The indicator provides a clear signal when it's time to enter or exit a trade, making it easy to work with. Traders who use this strategy can expect to see consistent results and high success rates.
How does contrarian trading work? ›
In terms of investing, a contrarian investor is someone who trades against prevailing market sentiments. When the market buys, the contrarian sells, and vice-versa. Contrarian investors look for opportunities to buy in a bear market and opportunities to sell in a bull market.
Has anyone become a millionaire from trading? ›
While some traders have been successful in becoming millionaires through scalping trading, many others have lost money and blown up their trading accounts. It is important to note that trading carries significant risks, and traders should only trade with money they can afford to lose.
Can you really become a millionaire from trading? ›
In conclusion, while it is possible to become a millionaire through forex trading, it is not a guaranteed path to wealth. Achieving such financial success requires a combination of education, skills, strategies, dedication, and effective risk management.
Is there a 100% trading strategy? ›
A 100 percent trading strategy is an approach that involves investing all of your capital into a single trade. While this can be risky, it can also lead to significant profits if executed correctly.
What is the simplest most profitable trading strategy? ›
One of the simplest and most widely known fundamental strategies is value investing. This strategy involves identifying undervalued assets based on their intrinsic value and holding onto them until the market recognizes their true worth.
How much money do day traders with $10,000 accounts make per day on average? ›
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
Is 90% win rate possible in trading? ›
Any system with a 5 pip profit target and a 500 pip stoploss will have a very high (probably 90%+) win rate. But then one loss will ambush you. In other words, you need to consider the RR (return to risk ratio) of each trade, as well as the win rate.
By developing a trading plan, focusing on risk management and position sizing, keeping a trading journal, using technical analysis, having realistic expectations, and staying disciplined, you can increase your chances of success. Remember that trading is a journey, and success takes time and effort.
What strategy do most day traders use? ›
Common day trading strategies include Momentum, Breakout, Range, Reversal, Gap, Trend Following, Mean Reversion, Scalping, News, Pattern, Support and Resistance, Fibonacci, Volume Spread Analysis (VSA), Event-Driven, Arbitrage, and Statistical Arbitrage, each with its own set of rules and indicators for entering and ...
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.
What is the golden rule of trading? ›
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
Is Warren Buffett a contrarian? ›
One of the most famous investors and an aficionado of the contrarian strategy is none other than billionaire investor and Berkshire Hathaway chairman and CEO Warren Buffett.
Is anyone actually successful at day trading? ›
The percentage of day traders who achieve profitability is relatively low. Various studies and broker reports suggest that a small fraction of day traders consistently make profits over the long term.
Is it realistic to make money day trading? ›
Day trading is tough. A University of Berkeley study found that 75% of day traders quit within two years. The same study found that the majority of trades, up to 80%, are unprofitable. While some day traders end up successful and make a lot of money, they are the exception rather than the norm.
What are the benefits of contrarian investing? ›
Margin of safety: Buying when stocks are at market lows ensures your money doesn't go toward anything below a stock's intrinsic value. Big returns: Despite the chance of long waiting times, contrarian investors have the opportunity to gain big on their investments once a falling market goes back to normal.
How realistic is it to make money trading? ›
While there is no guarantee that you will make money or be able to predict your average rate of return over any period, there are strategies that you can master to help you lock in gains while minimizing losses. It takes discipline, capital, patience, training, and risk management to be a successful day trader.
