Investology

The Basics of Trading Against Trends

Many investors may consider following trends as a safe bet. But most of the time, whenever a trend comes up, that simply means that traders are already entering similar trades somewhere in the middle. Going against the trend may seem risky for some people. But in a way, it can also be quite profitable, armed with the right timing and knowing how to make calculated risks.

In fact, going against what may be considered popular can also have its advantages. Contrarian trading is something that a number of traders oftentimes use to take advantage of a market that does not always work in a rational manner. Also known as counter-trend trading, contrarian trading is basically based on the fact that not all trends in the market are always right.

Going Against The Trend

Contrarian trading usually goes into the opposite direction of the current trend in trading. Its distinguishing factor is making moves that are opposite of the conventional approach. While most traders are recommending buying stocks, contrarian traders usually sell and vice versa. While most brokers usually think alike, they are not usually right all the time. They can also be prone to making mistake. It is during such instances where contrarian trading works best.

Method To Madness

In order to be effective in contrarian trading, it is important to know the basics behind the strategy. Contrarian traders still abide by the rule of always buying low and selling high, no matter what the trend may suggest. Even for contrarian traders, it is important to identify a particular stock and spot its trend. But instead of trying to follow the trend, the traders then try to identify the dips and peaks to spot the trend. Traders then try to buy on the dips and sell on the peaks. Contrarian trading does away with the effect of human emotion that usually affects a lot of investors and traders when making decisions. Many times the action develops market trends. Instead, it tries to stick to a simple rule to buy low and sell high no matter where the trend might be going.

Tags: contrarian trading