"contrarian Forex Trading Strategies: Profiting From Market Reversals In Australia"

 "contrarian Forex Trading Strategies: Profiting From Market Reversals In Australia" - Contrarian trading is a way to profit from crowd behavior. Most successful contrarians know that this requires understanding and then predicting the dynamics between market participants.

The most important dynamic is the interplay between the "price maker" and the "retail trading segment" - that is, the unsophisticated traders.

"contrarian Forex Trading Strategies: Profiting From Market Reversals In Australia"

The ideas I share in this post helped me generate consistent profits over several years of intraday FX trading and helped me become one of the top 14 Trading Leaders at Currensee. Currensee was the forerunner to newer social trading platforms such as ZuluTrade and eToro. At one time it was one of the largest FX trading networks in the US, with thousands of live trading accounts associated with it.

What Is Contrarian Trading, And How To Do It? Strategies And Tips

Some details of the performance during this period are given on the European Central Bank website here (page 29) and on the Japanese FXDD blog here (page 15).

Contrarian investing and trading is about doing things differently. It essentially means identifying what most market players are doing, and then doing the opposite. For example, if everyone buys an asset the contrarian sells and vice versa.

Price direction. Rather, it is about trading against the majority of market participants who act like a crowd. For example, if the majority expects a trend to reverse, the contrarian trader will continue to trade in the direction of the trend. On the other hand, when the majority expects the trend to continue, the contrarian will start positioning for a trend reversal.

The first step towards being contrarian is to understand market participants in terms of their performance and sophistication.

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Figure 1 below shows how a contrarian would typically classify market participants. This diagram shows participants in the foreign exchange (FX) market but is true of almost any other "off the exchange" financial market as well.

FX trading, at least in the very short term (think intraday traders) is a zero sum game. By this I mean another person's loss is one person's gain.

Within this space the general consensus is that market makers consistently make money and the crowd consistently loses.

For example, one subgroup of the crowd is the retail merchant community. The corresponding subgroup of market makers are those financial institutions and brokers who take the opposite side of retail traders' positions.

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Table 1 and 2 show one recent study in the United States where retail traders as a whole consistently lose.

There are several reasons that contribute to the poor performance of this subgroup. These can be summarized as:

Retail traders are probably the least successful subgroup of the crowd. However, the above factors can also affect other sub-groups that are part of the crowd. For example, these can be non-financial companies, as well as small and medium-sized asset managers.

In general, the less informed market participants are more likely to face losses in the market. And those with a less sophisticated risk management system are more likely to behave emotionally when faced with uncertainty. This leads to mistakes.

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Retail traders will lose. Many individuals are highly successful. Rather, I am classifying the aggregate performance of the whole group.

We must also remember that FX, for many participants, plays a functional role in meeting foreign exchange needs. For these players, profit is not even an issue.

In summary, within the various subgroups of the FX market there are plenty of opportunities for the contrarian to operate on bias and inefficiency. The next section shows how I do this in practice.

In order to formulate a contrarian strategy, the first task will be to look at the main assumptions that lead to negative returns and then adopt the opposite position.

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For example, let's take one of the most widespread assumptions behind naive trading decisions. This is the assumption that "history will repeat itself". In fact, FX markets are always in a state of flux and nothing is permanent apart from change. Although some events may seem remarkably similar, careful analysis shows that history never repeats itself exactly the same way.

In order to build a contrarian trade against this popular assumption, we need to find extremely similar situations and trades

Repeat the story of that event. In other words, we need to detect when the crowd, consciously or subconsciously, expects history to repeat itself.

Figures 2 and 3 show two similar technical patterns on the EURUSD chart. In both cases initially the pair moves up a distance of about 180 pips from a significant minimum (circled in red). These moves were slow at first with low volatility. Then in both cases, after facing some resistance, the pair suddenly moved up around 380 pips.

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Figure 4 shows the 24 hour volatility chart during the same period. As can be seen two distinct peaks occur in these two events. These are circled.

Taking the opposite view I now assume that the crowd will expect history to repeat itself. Namely, they will assume that the next movement of the second pattern from point D1 on Figure 3 will be down 420 pips to 1.0960. As EURUSD initially turns bearish, more people will start to believe it will reach 1.096.

Reach 1.096. Instead, the big move will be in the opposite direction. As such, I take the position that:

I set the stop loss at 1.096 because in this situation there is no point chasing the market down. If the price reaches this level I will know by then that my contrarian hypothesis has not expired.

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Figure 3 shows the trade above. As can be seen, this contradictory prediction does indeed play out. History does

Repeating itself. The market is rising strongly again after an initial bearish run. This occurs after meeting strong support around 1.1100 - perhaps this is a result of market makers having to offset their risk.

This example shows another case of similarity. This time I will look at a technical pattern along with a news announcement.

With my contrarian point of view, I first consider what expectations the first paradigm created for the second paradigm. For the first pattern, we have:

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Shortly before news is published, approximately 120 hours after the start of the second pattern, the contrarian will expect:

With these parameters, the take profit is at least 170 pips more than the stop loss. That is, 350 pips up from the maximum of the 1.0680 range. Again, if the price falls to 1.0450 I know that the contrarian setup has not played out and there is no point in chasing the market down further.

As Figures 5 and 6 show, we did not see a repeat of what happened in the past. After a false dip, the market rebounds and rallies strongly to the side. Movements of this type often trap a large number of market participants in losing positions. As a contrarian, my job is to be on the other side.

As a contrarian, it is important to realize that you will not predict every pattern correctly every time. What you should try to do is get an edge on the crowd. This can tip the odds in your favor by quite a bit to be profitable.

Contrarian Investing: A Stock Market Strategy For The Shrewd

If the similarity is simple and seen by many participants it will quickly attract large numbers from unsophisticated traders. This will create significantly contrasting views for market makers. In this case, it will be in their best interest for the probability to end so that they can reduce their risk.

If the similarity is complex, it will take much longer to be noticed by enough participants to attract large numbers and become a materially important factor in the market.

Because of the likelihood of mistakes, as a contrarian you will need to generate many trading ideas. This should be across a number of different currency pairs or other instruments. This will allow you to allocate a small amount of risk to each idea and thereby generate less volatile returns.

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Trade Against The Crowds: The Contrarian Trading Strategy!

Disclaimer: This is not investment advice. Forex, options, futures and CFDs are complex instruments and come with a high risk of losing money quickly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Want To Profit In Bull And Bear Markets - No Indicators, Fundamentals, Or Complex Analysis? Here's How... Get Your Copy (Risk Free)

In general, contrarian trading involves taking speculative trading positions that oppose the general directional trend.

When it comes to trading stocks, the contrarian strategy can also be considered a form of value investing.

The prices of those assets are showing signs of reaching a significant low point in order to sell them when they appreciate later.

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A contrarian trader may also look for overvalued assets whose prices appear to turn significantly lower in order to short such assets.

Rather than following the trend, as most new traders are taught to do, the general goals of contrarians is to do the opposite.

If you were told when learning to trade that “the trend is your friend”, then you might be

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