Contrarian trading is a style that consists of going against the herd most of the time. If everyone else is thinking that a stock or a currency is heading up, the contrarian trader will take a counter position, betting it would go down.
The idea is that if majority of people are holding a position one way, there won’t be enough people left who would keep the price going higher and people can start exiting their positions, as it doesn’t work out as planned. This will lead to a the stock falling in case of a general long bias or growing in case of a short bias.
Also another point for the controversial trading style is that majority of traders lose. The percentage of losing traders has been considered to be north of 90%. With that being the case, if you are able to somehow identify what the majority of people are doing, it would make a rather strong argument for going in the opposite direction.
How can you go against the market? A good tool for that is Etoro, which is a social trading platform. They have a social sentiment indicator, showing what most of the traders, that are using their platform, are doing with each currency or stock. The reason that we recommend etoro instead of a few other brokers that also offer a similar indicator is that they have by far the biggest nr of users – over 4.5 million. Other platforms don’t even come close.
4.5 million users should give you a very good overview of the overall sentiment of retail traders. If you pick a popular instrument, chances are that Etoro sentiment indicator will give you a representative overview of what the majority of retail investors are doing in all the platforms combined.
Putting the two together – take the contrarian strategy with etoro market sentiment and you are good to go for trying out contrarian trading. For practicing it is good to use a demo account. Make notes of your results and try to adjust your criteria as you go along.
Let us know if you have any experience with contrarian style of trading. Leave a comment below.