Is contrarianism too mainstream?

Discussion in 'Trading' started by Daal, Mar 27, 2008.

  1. Daal


    the amount of people talking about contrarian signals and trying to fade anything that even resembles a contrarian extreme and bloggers trying to fade crowds is getting to high imo
  2. hprop


    Haha, excellent point.

    When everyone is fading, what's the fade :)
  3. fire all those analysts, all you need to do to make money is to follow the most conventional wisdom and most obvious trade :D
  4. That's what makes bear markets so much fun...lots of "contrarian" players buying the dips!

  5. They are not true contrarians....contrarians do not fade a move just because. Most of these folks/bloggers are simply top and bottom pickers that will get smoked properly.

    True contrarians investors note the sentiment...file it step on the pedal when the correction occurs. Not a moment prior.

    Great book with a proper explanation of contrarian thinking : "investment psychology explained" Marting Pring.
  6. I think every good trader should be a contrarian and a skeptic to a point but there is a valid observation that most amateurs think they are a contrarian just because they are foolishly fading a strong move and trying to "out think" the market. Running with the herd is the right move about 80% of the time.
  7. jsmooth


    markets usually turn (or make drastic moves) when as many people as possible are not expecting it and they're not positioned to profit from it (or they're on the wrong side).

    Once all the contrarian guys get out because they've been wrong and beaten up numerous times is when the move (they original where trying to capture) finally happens - without them, and they're on the sidelines scratching their head wondering wtf just happened.

    It happens that way because a situation like that creates a massive order imbalance and panic....then everyone is running for the exits at once.
  8. heypa


    Be a herd animal and run with the crowd.In the jungle(grassy plains) the ones that stray or don't stay with the group are picked off by predators. More money is made with the trend albeit more slowly.The only way you make money is for someone else to make a trade in your expected direction.
  9. True contrarians don't play a contrarian move just because it went against the "tide". They make moves when the market tells them greed or fear is being obsessed by the general population. In other words, you don't short in a bull market just because it's up. You short when there is no good fundamental reason why it should be up (as evidenced in July of last year when the market surged and there was much proof that the subprime crisis was going to greatly devalue many companies)

    And in a "bear" market, a contrarian makes a move when really bad news comes out and the market overreacts. IMO, it's much easier to buy bad news then to sell good news. Fear is a more powerful device than greed. Fear causes people to become ultra-conservative and contagion causes everybody to latch on. Greed is less powerful to fade because by our very nature, humans are always (or most of the time) watching out for the predators. So, we "inch" our way up the greed ladder until we realize that we have stepped on broken rung. But, the path up that ladder is a slow and tedious process. You don't short until that broken rung has been reached. On the other hand, after realizing that the ladder is defective, people will get off that ladder faster than they can logically address the real danger. Thus, that one broken rung will cause an overreaction. And then the "slow" climb back up the ladder starts again from the overreaction.

    Humans are animals after all. We are much more afraid of being killed by prey than we are greedy about going after out prey. We would never venture out to get food if we knew that a predator was directly there. If we thought the predator was gone, we would slowly and attentively move out after our food. We would be overly conservative and wait longer than we need to. The overreaction that fear breeds.

    But, this is where I think fundmamentals trump techincal indicators. Fundamentals can tell you much more precisely if we are overvalued or undervalued. If we've overreacted or we've reached the broken rung. I personally would never play a contrarian move strictly off technicals. I would make sure that my own research on the fundamentals validates my opinion.
  10. jjk2


    the original poster had a very good point. i wonder about the same thing. now everyone is walking arounnd talking about contrarian indicators in school. i wonder if i should do exactly opposite of the herd, which is going with the original this wouldn't be contrarian anymore ?

    i guess you could further distinguish a contrarian by someone who puts money in their mouths; billion dollar funds and investors taking huge bets in the most peculiar sectors.
    #10     Mar 27, 2008