This is an interesting article about the Wisdom of Crowds in predicting future, but conventional wisdom is to take a contrarian position against the public frenzy. Which one is right? Please share your insight. http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100314/OPINION/703139962/1036/foreign
contrarian trading stems from a personality type http://www.elitetrader.com/vb/showthread.php?s=&threadid=193066&perpage=6&pagenumber=2
Nazzdack stated it correctly ..... some additional stuff the crowd is ALWAYS right in the middle of the trend and ALWAYS wrong at the end of the trend, but not just at any old end of trend - the important concept is "MAJOR turning points" ... this is where they are ALWAYS wrong. taking this further on a Thermodynamics basis ....... the participation of the crowd is very essential in the middle, high fuel, high octane part of the trend - without the crowd the very essence of HERD PSYCHE would be missing - this is also the reason why this part of the trend is called Wave 3, the majestic vertical power of the trend (only exception is when wave 5 is the extended wave as was the case with the Nasdaq into the 2000 top) so the question then becomes, "how does one know when we are at the MAJOR turning point without the use of TA, rather by pure HERD PSYCHE gazing/estimating? Simple!!! When even the taxidriver is telling you how he's so smart to have bought, you know the end is close. So then you go to your chart and will usually note the lower volume compared to wave 3, the massive divergence on Macd and RSI etc. So, if you're not a total screwball of a trader like me, you'd take profit right there and go to the beach until you see fellows jumping out of windows on Wave 1 down of the reversal - then you go back to your desk and go Short. Easier said than done ....
----------------------------------------- missed an ultra-important concept at the tail-end ... at the frothy top where even the generally lowest wage earners are in windfall luck, WHO ELSE IS LEFT TO BUY? ... i.e. where is the next dose of fuel going to come from? This is why the Trend bends.
In the long term the contrarian. In the short term, the trend may continue, but if you get at the turning point, the risk of losses is so severe that it's not worth trying.
I never understood why such complexity is necessary. Spot a strong trend, wait for intermediate weakness, wait for it to settle down or end, execute with the main trend and hold for a new breakout. Multiple entries might be required and it is in fact the entry that requires the attention because this is where you control your risk and risk is above all your utmost priority. If the trend happens to end or fake, well what can you do, you take your stop and move on to the same game but in a different ball park. Stay away from ranging non trending instruments only trade clarity and do not trade noise (insignificant little charts). The trick is mastering how and when to enter, and that takes years to achieve, the rest is easy. Ultimate goal is trading with as little heat as possible, the winners take care of themselves. No Heat
psychologically contrarian are chicken. in the bottom of their heart is: when they see rally, they thought it will drop, their fear of drop force them to take counter-trend trade; if they see drop, they thought it will rebound, the fear of rebound forces them to buy. normally this style is pretty profitable. since most people are afraid of buying on the rise or sell in the drop, so the prediction is pretty precise. most people like to buy on the reaction in an up trend. I normally sell new high, almost 99%time I am right. then in the retracement to the support, I buy, that is pretty safe and the odd of winning is high. buy on the rise/short in the drop is just suitable for momentum play. very rarely I buy on the rise, since most time I will get burned hard in the retracement (thought wrong and dump, later see it climb just as I predict, that is outrageous). so I am a contrarian. in a long-term up trend, I buy on the retractment, and I sell new high.