The Contrarian forex trading strategy is focused on identifying what the most of market traders are doing, and then doing the reverse. For instance, if every trader is purchasing an asset the contrarian is auctioning and vice versa.
A familiar misconception is that contrarian trading is close to exchanging against the current. Contrarian trading is not close to exchanging in reverse to the prevailing movement of prices. Comparatively it is close to exchanging against the most market traders who are behaving as a large assembly. For instance, if the majority anticipates that a trend will change, the contrarian trader will progress to exchange in the movement of the trend. On the contrary, when the most traders forecasts that the trend will progress, the contrarian will begin positioning for a trend u-turn.
- Distinctive traders frequently have low capability to analyze many complicated factors that influence the foreign exchange market.
- As conflicting to institutional traders distinctive traders frequently do not have strong risk management methods.
- Decisions made by distinctive traders are more focused to emotional preference than decisions made by groups.
- Small traders are price takers. They are exchanging on prices administered by market makers and aren’t part of the price creation process.
How to Exchange
In order to establish a contrarian strategy, the first step will be to observe at the key assumptions that results to negative returns and then embrace the opposite position.
For instance, let’s use one of the common widespread assumptions behind unsophisticated trading decisions. This is the belief that “history will repeat itself”. In facts of existence, forex markets are consistently in a state of change, and nothing is constant exclusive of change. While some incidents may appear remarkably similar, thorough analysis indicates that history never replicate itself in definitely the same way.
These “repeating events” occur in many various guises. They can be affiliated to:
- Economic situations.
- Technical factors.
- Fundamental broadcast announcements.
- Interventions and policy decisions of the Central Bank.
- Other markets related to foreign exchange (such as oil prices, treasury yields, stock prices, gold, etc.)
Instance of Exchanging Against History
Figures 2 and 3 illustrate two identical technical patterns on the EUR/USD diagram. In both scenarios the pair at the beginning moves up a distance of approximately 180 pips from an important minimum (circled in red). These moves were at the beginning slow with low unpredictability. Then in both scenarios, after undergoing some reaction, the pair moved up aggressively about 380 pips.
Figure 4 illustrate the twenty four unpredictability diagram throughout the same timeframe. As you can notice the two apparent peaks take place at these two occurrences. These are circle around.
The contrarian perspective: Adopting the contrarian perspective I now speculate that the crows will anticipate history to repeat itself. In other words, they will speculate that the next move of the second design from point D1 on figure 3 will be beneath 420 pips to 1.0960. As EUR/USD at the beginning turns bluff, more traders will begin to anticipate that it will stretch to 1.0960.
The contrarian exchanging idea, focused on the assumption that history will not repeat itself is as follows:
I speculate that the wave beginning from 1.1380 will not stretch 1.0960. Instead the key move will be in the reversed direction. Independently I set the position:
- Purchase EUR/USD beneath 1.1120.
- The entry point is supposedly the amount of the stop-loss in pips and no greater than the take-gain.
- The stop-loss is established at 1.0960.
- Take-gain is established at or on a small scale above 1.1380.
Utilize this strategy at your own risk. WindsorForex.com cannot be responsible for any losses associated with using any strategy presented on the site. It’s not recommended to use this strategy on the real account without testing it on demo first.