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Contrarian Trading

Many beginners start their trading by picking top and bottom once they got hold of a trading book or attended a trading course. Indeed, there are many trading resources and educational programs that advocate this contrarian method of technical trading. Contrarian traders seek to profit by identifying the peak of a bullish trend or the trough of a bearish trend in order to sell the overbought bullish market or buy the oversold bearish market. This method is contrarian because traders are literally selling into the bull market and buying into the bear.

Theoretically speaking, this method of trading is sound and well. In practice, however, it is a highly risky trading tactic. One big reason: the traders are trading against the trend! In my early years of trading, I have tried the contrarian approach countless of times. I had my fair shares of profits but I had bigger shares of loss. I blamed myself for being inexperienced (because the books said so) and for not able to stop my loss decisively when the markets were against me. These picking-top-and-bottom trading techniques are so entrenched in the trading world even till today that I did not think there were problems at all. Realistically, contrarian trading has more potential hazards than any trend-following strategies.

Admittedly, I do not believe in contrarian theory anymore than I believe in politicians now. Nevertheless, it can still be highly profitable when you can accurately identify the turning points. Yes, I don’t ignore the possibility. Unfortunately for beginners, this is a challenge. Your ability to identify the signals is utmost critical, so is your quick wit to smell trouble when things go awry. These are traits that most beginners don’t have. Therefore, I prefer the trend-following strategies to the contrarian strategies for beginners, even for me.

My suggestion to beginners on contrarian training is practice. Try it out on paper trading or, if you are more inclined to keep close eyes on trades when real money is involved, try it with less capital and less open trades at any time. Again, education still comes first. You may want to obtain more information from this site StreetSmartOptions.com managed by a friend whose expertise is in trading reversal signals.

Seriously, I truly believe that beginners should start with trend-following strategies in their early period of trading. The infamous quote of “the trend is your friend” is definitely in your favor. Do go find some books that teach these strategies.

Trading the News

Another type of trading that attracts scores of people is news based speculations. Relying on news to determine which way the market goes sounds reasonable and logical. For instance, if you know Apple Computer is doing very well, it sounds reasonable to believe that the company’s stock will surge upon releasing its earning results. You will be surprised how often this stock rarely behaves the way it should. Quite the contrary, the stock actually fell ferociously in a couple of times that I know of. It drops not because it did not make money, but because the market players did not think it made enough money. Certainly, it could also be a case of “buy the rumors and sell the fact” phenomenon. I have seen too many people hear some news, see a quick burst in price, and jump in, not knowing that the stock price has already reached its peak. The next thing they realize is that the market dipped hard and caused traders to lose money unexpectedly.

If you think only stock news are unreliable, think again. In March 2003, the US President George Bush officially announced the invasion of Iraq. Most people would expect the equity markets to drop. Instead, the markets surged after the announcement. The bull run lasted till October 2007.

That’s not all. As recent as the July 7, 2005, bombings in London, the markets reacted with a fervent spree of buying a day after the incident, pushing the financial markets to an all time high. However, on the day that the bomb exploded, major world financial markets were in a tailspin with severe sell-offs. How do you reconcile the difference in sentiments of the two days just back to back to each other?

There are numerous other logic defying examples about news. This makes trading with news a dangerous endeavors for almost everybody, not just the beginners. There is absolutely no good explanation for how the markets behaving differently with the similar types of news. Certainly, there is nothing for traders to learn from these past experiences and to improve, more so for the beginners. It is really disheartening to see the first few ventures into trading could end with a complete disaster.

My conclusion on trading with news is simple. Just avoid it, especially during the first year of trading, no matter how promising the returns are. There is no point in talking about gigantic returns while you have almost no chance of getting it.

Trading is a Business

One very common mistake people made when they first jump into the bandwagon of trading is their unrealistic expectation of what trading means to them. Most traders have aspired to find alternative source of income to supplement their stable income from either their jobs or businesses. They have no intention whatsoever to treat the new money-making venture as a serious business. They thought they would take it easy and just tried to enter the market whenever they were free. Perhaps just once a week they make about 10% per trade would be more than enough to cover the shortfall of the normal income to meet household expenses. Right, there is absolutely no necessity to invest in time and effort to hone trading skills.

I have met many of such people. To these people, spending time to learn fundamental or technical analysis is a waste of time. All they rely on is gut feel. They advocate buying stocks when market crashed; keep them if continue to lose money; cost average down to lower average cost of investment; take profit as soon as there is a small gain; and when all things fail, leave the investment in the account for as long as it takes to see profit again in the future. They have absolutely no common business sense in this field of activity at all, treating it as if it was just an entertainment game they play over the weekend. If they make money, they will celebrate and spend the winnings on dinner with family and friends or buy a new television. If they lose, just swear to heaven for bad luck and would come back to market with vengeance.

No, trading is serious business! Until you have come to the realization that you need to treat it as a business just as any kind of professions, you can’t be making serious money in the long run. Basically, you need to learn the loop, make plans, keep proper records, keep your losing trades low, review the performance every month, lower your transaction costs and others, and not spend the winnings away easily. Trading requires commitment and constant decision making to manage risk and reward, just as any business. And you need to be alert at all time.

There is nothing wrong to treat trading as a hobby. But all hobbies cost money. Until you can turn it into hobby-cum-business, you are wasting time and money.

I like to say a few more words about trading as business. Although any responsible trader should be serious about trading, it should not be misconstrued with watching the market day in and day out. Watching the market every minute of the day is not a business discipline. It is a habit. It offers no material benefit to many traders that I know of, unless they are micro day-traders. The difference is in the responsible attitude in taking care of and managing all things related to trading for long-term professional growth.

In summary, you should critically evaluate your purpose of trading before you commit yourself to this business. Trading does not require full time of the day, but it does require care for each trade you make.

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