Contrarian Trading Strategies For Forex Traders
The Contrarian Trading Strategy involves buying a currency when its value is weak, and Sell the currency when its value is strong. How to?
The Contrarian Trading Strategy is generally known as a tactic practiced by stock traders and investors by buying good stocks when the price drops. However, did you know that Trading Contrarian Strategy is also popular among Forex traders !?
In this case, the Forex traders using the Contrarian Trading Strategy tend to open positions that are opposed to the current market bias, with the aim of gaining profits when later market sentiment reverses . Therefore, Trading Contrarian steps include Buy a currency when its value is weak, and Sell the currency when its value is strong.
Definition of Contrarian Trading Strategy
Core Trading Contrarian is recognizing what the majority of market participants are doing, then taking a completely different action . For example if other traders are launching a sell, then the perpetrator of Trading Strategy Contrarian will actually buy. Vice versa.
Many people mistakenly think that the Contrarian Trading Strategy is inevitably against the trend. In fact, Trading Contrarian is not necessarily against the trend ( Counter Trend ) , because the focus lies in acting in opposition to the majority of the crowd . For example, if the majority of traders expect the EUR / USD price trend to reverse, then the Contrarian trader will continue to trade in the direction of the trend. On the other hand, when the majority of traders ( crowd ) predict the previous price trend will continue, then the Contrarian trader actually prepares to face a reversal .
Therefore, the first step to becoming a Forex trader using the Contrarian Trading Strategy is to understand the market.
Why Can Traders Contrarian Profit With Against The Majority Of Market Participants?
In the eyes of the Contrarian trader, there are several reasons why “against the majority of market participants” is profitable. The following are:
- Market Maker will always take a position opposite to the majority ( crowd ).
- Trader Profitability Data Small in a number of large brokers clearly shows that traders who managed profit was smaller than the number of losers. The data can be seen in both tables below, as quoted from the results of the survey of Finance Magnates by ForexOp .
From both tables, it can be clearly seen that from the first quarter of 2013 to the first quarter of 2016, at the top US brokers, the percentage of profitable traders is never more than 50 per cent; not a majority at all . Conversely, the loser traders can actually reach 70 percent of the total clients of a broker! Here, it is evident that “following the majority” is not a lucrative option.
- The last reason: Because it is often anticipated early, the Contrarian trader can capture a good position when there is a reversal with the optimal Risk / Reward Ratio . Although, the strategy is not 100% certainly true.
How to Conduct a Contrarian Trading Strategy?
Contrarian traders will act on moments when the majority of market participants are being carried away by a momentum of strong price movements in a direction, then choosing opposite positions . When the majority of market participants prepare to push prices higher, it often results in prices being too expensive ( overpriced ), while creating a gap for Sell. And vice versa, when everyone is doing a sell-out, that’s exactly the opportunity to do Buy; it’s like shopping at a mall at discount prices at the end of the year, not when the newest model of new clothes is launched.
There are many ways for Forex traders to identify the right moments for Contrarian trading, both from a fundamental and technical perspective.
Trading Contrarian From Fundamental Perspective
Some are trading Contrarians with “against history” when ahead of important news , such as the announcement of the Federal Reserve interest rate policy. For example, the majority of markets assume that the US Dollar will strengthen after the announcement of rate hike this time, because after the previous rate hike, the Dollar soared; then the Contrarian trader will actually assume otherwise, ie the Dollar will decline after this announcement.
Trading Contrarian From Technical Perspective
Compared from a fundamental perspective, the most commonly traded Contrarian trading by Forex traders utilizes technical analysis. For example by understanding Price Action (characteristics of price movement), recognizing Divergence , or other techniques that allow traders to detect early reversal .
Divergence can be easily recognized from the difference in direction between the price movement and the direction of the Oscillator type indicator charts such as MACD and Stochastics that can be found on any trading platform , including Metatrader4 and Metatrader5 . When the price of a currency pair rises, but the indicator actually decreases, it denotes the Bearish Divergence. Meanwhile, if the price declines, but the indicator actually stretched up, then it denotes Bullish Divergence.
In addition to the ways above, of course there are many more ways to run a Contrarian Trading Strategy. However, whatever way you take, one thing is worth noting: just by acting Contrarian, does not necessarily mean you will always be right . Uncertainty is something that absolutely exists in the Forex market.Therefore, it is important to apply risk management , either by limiting the position size to not opening positions with lots too large, balancing the Risk / Reward Ratio, using Trailing Stop, or other means.