Strike Analytics

Be a Contrarian - To Yourself

5 Jun 201705:01 AM

This is the last thing you are going to expect from an Article about being a contrarian. Being a contrarian to most people means doing the opposite of what everyone else is doing. Now while that is another game it is not the point when you are taking trading/investment decisions. In the medium term technicians [including myself] will use indicators like A/D ratios study FII stats Options Put/Call ratios to determine what the street is doing. Long term investors will try to read the tree leaves, like in the old days whether the shoe shine boy is giving him tips, and for today's sales traders whether their local ''pan and bidi shop is giving them stock tips''. Or is everyone opening up Demat accounts? 

Thanks to the technological changes some of those tea leaves are distorted. Everyone is online and you cannot check or visually see the masses herding. And even then when will the herd stop? 

When it comes to near term trading or investing the biggest problem is not figuring out this long term contrarian stance. The biggest hurdle to taking actions is being a contrarian to ones own emotions. This especially to all those people who watch prices once a day or a week or maybe all day long is a great hindrance to success. Learning this takes some practice and maybe a few years of mistakes. But after, that the ability to step out and tell yourself, that under these circumstances the way you are feeling you need to act opposite to your emotions, is key.

Buying the dip is easier said than done. Past experiences of buying a dip and losing can often cause you to back off from taking such action. But there are two levels of trend. One is to identify that the trend has changed from down to up. It is only after that, that you are required to buy the dip every time. Still past experiences of doing so can keep you from doing the right thing when the time is right. This is what I call being a real contrarian. When prices dip and all traders are losing hope, some long term analysts are coming out and repeating their long held beliefs that this is not the right thing to be in. Charts show a long term up trend and a near term retracement that is apt for action in the direction of the trend. It means to buy fear and sell greed. This self contrarianism is an essential emotional quotient to taking the right actions at the right time more often than not. 

In other words you know you are right about where the price is heading overall but the near term loss instils in you the fear of being wrong, that is often the time to act otherwise. Against your fears of being wrong to simply doing what must be done and look at the results later. Later of course means having the patience to see what happens next.

Now I understand that the market is the greatest leveller and by its own actions it tells you whether your overall view on things is right or wrong. So despite all the preparation above if the contrarian actions result in a loss then it means that you need to revisit your opinion. But being a contrarian to your emotions is the only way you can get yourself to start trading a trend from bottom up keeping the risk of the trade or investment near its lowest.

Now this does not mean that you go all in at the lows. Trend following was never about that. Trading the trend as described in my ''Positions Sizing Video'', is all about buying in the direction of the trend with confirmation tools. The advantage of adding positions in the direction of the trend is that you always average on the way up meaning that your buying price always remains below your cost. 

So if you thought that the first few paragraphs of this note were telling you to average your losing trades then you got it all wrong. No trend that is up [or down], does so in a straight line. So traders will often move out of a position and then have to move back in as long as the larger trend is in force. Investors also need to invest more capital when new opportunities are presented by the market when the world believes that all is lost.

Being a contrarian is about being able to get back into the trend again and again and then build your way back. For leveraged traders this has to become routine. For Cash investors it is a waiting game. Waiting for those reactions in price that no one was expecting back to a weekly or monthly average that has held the trend and being able to add to your existing position or new opportunities there. Here too patience is needed to wait before deploying new capital for the right market conditions. And then being a contrarian and making the move. 

Learning to read your own behavioural patterns and emotions to act against them is among the biggest learning of all those successful in the markets. It may not be imbibed in one year but may takes years of mistakes that leaves behind a series of emotional experiences to draw from. After that EQ learning, you may want to start a fresh on a new account always reflecting on your past patterns to act in opposition. Asking yourself about what emotions you are feeling and what they mean might help. You could even make a list that reads ''What you are felling'' - ''What you should do''. Such rules are also useful in taking trading gains. There are times the market makes us give up big trading gains because we did not book out waiting for more. Asking yourself if the said amount meets certain goals or simply whether you think ''it is a lot of money - then book'' maybe, as simple as it is. 

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