Contrarians and the Permanent Bear or Bull Mentality
There is an important difference between a bear mentality and the contrarian trader or investor. A trader with a permanent bear mentality believes that market trends are always downward, even in bull markets. While the view is contrarian, it is unyielding. The permanent bear is right only half of the time.
An equally common problem is found in the overly optimistic permanent bull approach. Like the bear, the bull is right only half of the time and during bear markets, the bull trader is acting in a contrarian manner.
A true contrarian is more flexible than either a permanent bear or a permanent bull.
Key PointUnlike the permanent bull or bear, a contrarian recognizes that opportunities are most likely to occur at the top of an uptrend and at the bottom of a downtrend.
Contrarians belong to neither the bear nor the bull camp because they have specific traits:
- They are able to think and act independently. Perhaps the most difficult character trait to develop is thinking independently, especially when the majority holds an opposite view. The independence of thought that contrarians work to create in themselves requires self-discipline and demands that you ignore impulse and gut reaction. The gut reaction that arises when you are tempted to go along with the majority is most likely to occur at the wrong point in the price cycleâto buy at the top and sell at the bottomâand this is where the contrarian philosophy is based.
- Contrarians are not invested in price direction. Many traders and investors are personally invested in a fixed belief about the market. Either they are optimistic and believe that prices are always about to turn upward, or they are pessimistic and believe that the market is about to crash. A contrarian refuses to adopt a fixed philosophy or to give into social pressure to act on beliefs that can only be correct for a small period of time.
- A default assumption is that the majority is more likely to be wrong than to be right. It is not fair to say that the crowd is always wrong, but it is equally false to assume that the crowd is always right. When in doubt, a contrarian will choose to go with the belief that the majority is more often wrong than right. If you track trading volume along with price trends, you often see rises and even spikes in volume right before a price reversal at the end of the trend. In fact, swing traders look for volume spikes as one of the strongest reversal signals, primarily because the majority acts within the crowd mentality, with accelerated buying at the top and selling at the bottom.