Thursday, May 21, 2009

Contrarian Thinking

I read Market Wizards again now after 1 year of study on trend-following, counter trend trading and so on... I was really thinking there is a perfect system or some people that rally exactly know why smtg moves -- so after all trading in different modes and different markets I feel now a bit "baptized by fire" and got back to basics.

Mark Douglas is very true that people don't think trading is casino - but as I see those 95% group must be doing exactly this.

I was thinking after I read "Trend Following" as I started looking for trend systems. There are just as great "Trend-followers" as much as those that are labelled "Contra-traders". I believe that the intuition of the discretionary trader is as much of a weapon as the faith in the long temr success of the trend system in the trend trader. They have different personalities and so are their trading styles..
However what they share is the true sense of success and that is most important.

What I want to clear is that what differentiates a Successful trader from the 95%. Let's take CONTRARIAN thinking for example:

1. When a market is making 20 or 50-day High and is very bullish, then going with the Strong trend is obvious?
But then how many are strong enough to buy the 20, 50, 89 or 200 Day High. Think most people will have this FEAR it is too high and have to retrace - so 95% group all starts to sell. A bit what happens with S&P last 2 months..

So then CONTRARIAN seems is to go with the trend as for the majority of people going with the flow is just too hard - most people think they have to struggle.

Think I read this in FF time ago that it takes 55-60% bullish sentiment for a rally - but a 90-95% bullish sentiment is a sure Trend reversal.

2. So again when the whole public is convinced - it is so easy to go with the crowd - but then it takes CONTRARIAN thinking to see that if everyone bought there is no one left to sell to.
think it is the psychological frame - then comes to the execution frame - which is where Risk management kicks in:
1. First to trade as little as to not lose your capital as then there is no more opportunity.

2. Take any trade with reasonal R/R since every next around the corner might be the winner - but take only a little hit so you can withstand the series of fake signals until the good trade kicks in.