The Contrarian Approach to Trading
Whether you consider yourself an investor or a trader, a second question you need to answer is whether you are going to employ strategies in a contrarian manner.
A contrarian approach is based on the belief that the majority is usually wrong. Accordingly, by buying when everyone else is selling, and selling when everyone else is buying, the logic follows that your experience will be better than average.
This oversimplifies the strategy to a degree.
The majority is often wrong, but the belief that most traders are always wrong is not accurate. As a general rule, following the investing and trading crowd is a mistake; by the time a trend or opportunity is recognized by everyone, it has usually passed. In that case, jumping in is a matter of poor timing. Contrarians recognize that most buying activity peaks at the top of an uptrend and most selling appears at the bottom.
The contrarian is not simply contradictory; he or she just realizes that timing of trade decisions is likely to be wrong.
This is true. It gives profound context to the old advice, 'Buy low and sell high.' That sounds easy assuming you know where 'low' and 'high' are located. The contrarian approach is based on the realization that the majority (not everyone, but the majority) tends to do the opposite, to buy high and sell low.
By Michael C. Thomsett