Contrarian Trading

"Do the opposite to everybody else
and you'll be OK"

In commodity trading you will come across this remark, which is of unknown origin.

Some believe it is a response to the statement - the majority of commodity traders lose money.

The reasoning is that if the majority of traders lose money by trading the way they do - then trade exactly the opposite way and you will make a profit.

In general, this advice is not at all practical because to begin with, you would not be able to discover what 'everybody else' is doing sufficiently early to be able to do the opposite.

Continuing from this point there would then be all sorts of other problems not worthy of the time it would take to consider. It all adds up to being a bizarre suggestion.

No, this advice can't be taken seriously as it stands - but is there anything behind it?

There are certainly some strong views that it's good if possible to select entry and exit points that are not the 'obvious' ones.

If everybody is trying to get into or out of a market in the same place, then there will be intense competition at that point and the price will move fast against them.

This causes what is known as price 'slippage'. It is a common reason why you find that the price you obtained is worse than you expected!

It is therefore not a good idea for your entry and exit points to be 'obvious'. However if your system needs to have those exact points, then have them - the demands of your system must override, if necessary, concerns like slippage.

What about using popular system rules?

Popular system rules will generate entry and exit points that are 'predictable' and therefore this amounts to using the same entry and exit points as numerous other traders.

But popular systems are still fine. However if it makes you feel more comfortable, you will probably be able to adapt any of them to enter and exit in places that are different to the 'standard' rule.

There is nothing wrong with going further towards cultivating a contrarian attitude in your trading. It is unlikely to do any harm as long as you only make your decisions after properly evaluating them.

The most important thing of all is that you should feel comfortable with your system choices.

If you feel more comfortable being different, then by all means be that way - enter and exit the market in less expected places - insist on having system rules that are unique and different to any others you know.

If you are comfortable with your system, that is the most important thing. You are then much more likely to keep the First Commandment of Trading, which is - follow your system.

 

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Copyright David Bromley 2006
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