Contrarian Approach to Online Trading

The Contrarian Approach is very interesting for those who understand trading differently from the masses and love to introduce the element of "courage" into their investment activity, even at the cost of increasing - albeit within the limits of their own rationality - risk propensity. Also because, it's good to make it clear right away, the Contrarian approach is by definition difficult and risky. Obviously, for those who know how to put it into practice, it's a risk that pays for itself, and with interest. For everyone else, it could be considered a danger. In the following article, we will talk in-depth about the Contrarian approach, listing its basic principles, the techniques it underlies, the risks, and more.

The basic principles of the Contrarian approach

What exactly is meant by the Contrarian approach? Explaining its definition is not very difficult. Putting the Contrarian approach into practice means acting on trend reversals, indeed... Anticipating them (albeit slightly). It's an approach radically different from trend following and also very difficult. In fact, it requires analysis skills and timing. Consequently, the basic principles are as follows.

• Waiting for the reversal. The basic idea is to exploit trend reversals, indeed to bet everything on them. Compared to trend following, this approach requires a simply perfect ability to read and interpret the market, which therefore underlies an analysis (technical but not only) that cannot leave anything to chance.
• Anticipating the market. It's evident that this approach, to work, must be based on one element in particular: timing. This poses an additional difficulty, as the trader must not only identify a future or probable trend reversal but must also know, roughly, the moment when this reversal will take place.
• Supports and resistances. Analysis and timing, two complicated skills to acquire if you practice Contrarian. For this reason, it's necessary to read the chart correctly. Specifically, by studying and exploiting supports and resistances.

What does the Contrarian approach really consist of

How do you follow the Contrarian approach? What are the actions to put in place? Providing a guide on Contrarian here is impossible, but we can still list the main actions, those that allow you to produce profits.

• Buying on supports. It's obvious, if you expect a trend reversal, and indeed you base your hope of generating profits on this phenomenon, you need to leverage the pivot points. In this case, the price instead of breaking through the level, simply bounces off it. In light of this, it's obvious that if the trend is apparently descending, the purchase should take place on the support.
• Selling on resistances. For the same reason, namely the expectation of the "bounce", those who practice Contrarian - and if conditions allow - sell on resistance. This happens when the trend is apparently ascending but the price bounces off the resistance.
• Buying when indicators signal oversold conditions. This is a very important point. What signals does a trend reversal launch before bursting into the market? Reaching an extreme condition by the volume. If the price is falling and at the same time there is an oversold condition, therefore an increase in volumes, it means that the trend is running out.
• Selling when indicators signal overbought conditions. In the same way, but in the opposite direction, those who practice Contrarian sell when there is an overbought condition, therefore a disproportionate increase in volume.

Risks of the Contrarian approach

The Contrarian approach is very complicated. As we have seen, it presupposes the possession of specific skills superior to the average trader (even experienced ones). Analysis, intuition, timing, and courage are the necessary qualities. Also because there are numerous risks that are run, especially compared to trend following.

• Potentially higher losses compared to trend following. This is a physiological risk, moreover quite intuitive. If Contrarian is more complicated than trend following, it's more likely to lead to greater losses. Moreover, since the base event occurs or does not occur almost immediately, you risk losing quickly (if the trend does not reverse).
• Low gains. This is a risk, not at all obvious. Generally, it's thought that following a bounce on levels, the price always and in any case reverses. Instead, it can move sideways, or thereabouts, enormously reducing the space for the realization of good profits, even if you had acted promptly.
• Structural difficulty. It's worth repeating: to do good Contrarian it's necessary to have above-average skills both in terms of analysis and the decision of the entry point. Skills that are not very widespread, which make it really difficult to put this approach into practice with profit.
• Predominance of the stop loss. If there is a risk of losing immediately, it's obvious that great importance is covered precisely by the stop loss. Those who practice Contrarian, and do it well, spend a lot of time setting the stop loss, fearing that the trend will not reverse. An eventuality that, as we have already specified, is very frequent.

Tips for good Contrarian trading

In this context, logically, it's impossible to provide a step-by-step guide on how to practice Contrarian. However, we can provide some general advice, in order to avoid at least the most frequent mistakes.

• Avoid phases that threaten laterality. Laterality is often a bad thing, but when practicing Contrarian it always is. The risk is to nullify the efforts of analysis, understanding, and choice of timing. Therefore, the advice is to move on if you suspect a lateral phase, or even if there is only a timid signal about it.
• Set tight stop losses. If the risk of immediately going into loss is high, if the losses can be substantial in case of continuation of the trend, then there is nothing left to do but defend yourself as best you can. That is with particularly tight stops. This tight stop loss problem is only half a problem, since - precisely - you realize almost immediately if the price will reverse shortly or not.
• Don't forget fundamental analysis. If we talk about resistances and supports, overbought and oversold conditions, the thought immediately runs to technical analysis. Certain elements can only be identified and used through technical analysis. However, limiting yourself to it is wrong. Also because there are many other factors that can determine a trend reversal, even beyond the starting volumes. For example, economic, political, and social ones. The only way to investigate them is precisely fundamental analysis.
• Avoid over-trading. The Contrarian approach is not exactly made for day trading. Also because within a day it's more likely to identify retracements, rather than real trend reversals. So don't mix intraday with Contrarian: they don't get along very well.