Some days most forex pairs are only getting in one particular direction and it is mindless to go against the herd.
Nevertheless, when you’re a fan of picking tops or bottoms and when you think that these strong trends are already exhausted, you shouldn’t be afraid to take a contrarian approach to your forex trades.
When all charts point to a single direction and the present market sentiment is supported by the newswires, it’s easy to know why many traders hesitate to go against the herd.
But as investment pundit Warren Buffett famously said,
“We should always even be fearful when others are greedy and greedy when others are fearful.”
You see, simply because a majority of the traders on the market have a certain trading bias, it doesn’t necessarily mean that they’re right.
Sometimes, strong momentum merely reflects the doorway of trading amateurs that just glide without knowing what’s driving price motion.
For this reason following the flock blindly can result in herding bias – certainly one of the 5 common trading mistakes traders make.
Ask anyone who has successfully tried trading against the herd and they’re going to inform you that it could feel intimidating when your evaluation leads you to an unpopular bias.
But sometimes, it pays to go against the herd and be the odd one out – to be the contrarian.
Contrarian trading is a forex strategy that favors going against the present market bias in anticipation of a shift in market sentiment. It involves buying a currency when it’s weak and selling it when it’s strong.
Contrarian traders attempt to reap the benefits of moments when the markets get carried away by strong momentum.
When everyone and his grandma are ready and willing to push prices higher, it could sometimes result in overpriced assets. Likewise, when everyone seems to be hell-bent on selling an asset, opportunities to purchase at a bargain arise.
One among the primary advantages of contrarian trading is that it lets you get good prices and catch reversals right as they start.
In turn, this often results in very attractive reward-to-risk ratios, supplying you with more bang in your buck.
Nevertheless, contrarians trade against the trend, and that doesn’t all the time work out of their favor. Because the saying goes, “The trend is your friend,” but it could be a mean son of a gun once you fight it.
When a trend is especially strong, it could bust right throw potential reversal points and wash away those that go against the flow.
Certainly not am I saying that you must go against the trend only for the heck of it.
What I’m merely saying is that if, after thoroughly conducting your personal fundamental and technical evaluation, you’ve got enough reason to imagine that the market is about to show, don’t be afraid to go against the herd and take a contrarian position.
Remember, you don’t all the time must glide; loads of lucrative trading opportunities arise from straying from the group.