Forex Trading: The Contrarian Opinion Principle

Being a contrarian can pay off in Forex Trading as well. There is a specific approach, in fact, that is based precisely on the concept of being a contrarian. It's the principle of contrary opinion. It's worth taking into consideration, even though it harbors the seeds of profit as well as those of capital loss. If implemented with little prudence, in fact, this principle can quickly lead to defeat. We discuss it in this article.

What is the principle of contrary opinion

In theory, the principle of contrary opinion is very simple to understand. It can be summarized in a few words: behave in the opposite way compared to other traders. All traders, or almost all, are buying? The principle of contrary opinion indicates that it is necessary to sell instead. All traders, or almost all, are selling? Then it is necessary to buy. Generally, we speak of the principle of contrary opinion when the trader behaves differently from 80-90% of traders. This poses a first difficulty, which is being able to identify the general sentiment. A bit difficult, if you dedicate time to it. Certainly feasible, if you also use technical analysis (e.g., with overbought and oversold indicators). Does the principle of contrary opinion work? In theory, yes, it can work. The "contrarian" trader, in fact, can see very well, and rightly so, an exhaustion gap where others see an ideal entry point. They can very well see, behind a concordant market vision, great pressure on prices.

The risks of contrary opinion

Obviously, the tactic of contrary opinion is very risky. Also because, from a certain point of view, it suggests an anti-trend behavior. All Forex Trading operators, and not only, know that going against the trend is dangerous. Also because it requires the utmost timing, and it is also necessary to temporally circumscribe one's trades, knowing when to exit and not just when to enter. Furthermore, the vast majority of cases in which the principle of contrary opinion can work is when a rebound occurs, since a trend reversal would certainly not go unnoticed by most. The rebound is a very particular phase, as it can end at any moment and exhaust itself very quickly.

The only way not to fail if you go against the trend

Apparently, the principle of contrary opinion is the prerogative of experts, that is, those who manage to handle counter-trend operations. In reality, it can also be used by "common" traders, as long as they take the necessary precautions. In this case, in fact, any protective maneuver assumes capital importance. First and foremost, the stop loss. The stop loss is the only truly effective tool capable of avoiding copious money losses following a failed trade. A characteristic that is more necessary than ever, if risky techniques such as those that follow the principle of contrary opinion are adopted. The advice, therefore, is to set very strict stop losses.

A middle ground

However, there is a middle ground between the most fierce trend following and the principle of contrary opinion. A tactic that, perhaps, while allowing you to exploit any rebounds, does not expose you to the risks of a hard and pure counter-trend. Also because most traders who experience profits as a result of the contrary opinion tactic are actually unable to replicate what they have achieved. Ultimately, the success of this approach could be a matter of luck. Not exactly a good calling card, but rather a dynamic to absolutely avoid. The advice, in this case, is to look at volumes. If the trend appears solid, but volumes seem to be falling, then one can think, if not of a rebound, at least of an imminent trend reversal.