What is Contrarian Trading?
Contrarian
Forex Trading Glossary
Quick Answer: Contrarian trading involves taking positions opposite the crowd when sentiment or positioning reaches extreme levels.
What is Contrarian Trading?
Contrarian trading involves taking positions opposite prevailing market sentiment. Contrarians believe extreme optimism or pessimism often precedes reversals.
Contrarian Tools
- Sentiment indicators: Commitment of Traders reports or retail positioning data.
- Volatility spikes: High implied volatility can signal capitulation.
- Divergences: Price making new highs while momentum wanes.
- Media narrative: Overwhelmingly one-sided headlines may signal exhaustion.
Patience Required
Markets can stay extreme longer than expected. Wait for concrete reversal signals before fading the crowd.
Contrarian Trade Plan
- Define invalidation: Know exactly where the contrarian thesis fails.
- Scale in carefully: Consider staggered entries to manage timing risk.
- Use confirmation: Candlestick reversals or break of structure add conviction.
- Respect risk: Contrarian trades often oppose strong trends, so keep size modest.
Related Terms
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