Some days, most forex pairs go in one particular direction, and it makes no sense to go against the herd.
However, if you are a fan of picking tops or bottoms and if you think that these powerful trends have already been exhausted, You shouldn't be afraid to take a contrarian approach to your forex trades.
When all the charts are pointing in one direction and the current market sentiment is supported by news outlets, it is easy to understand why many traders are reluctant to go against the herd.
But as investment guru Warren Buffett famously said: “We must also be fearful when others are greedy and greedy when others are fearful.“
You see, just because the majority of traders have a certain trading bias, it does not necessarily mean that they are right.
Sometimes, strong momentum simply reflects the entry of trading amateurs who go with the flow without knowing what is driving the price action.
That's why blindly following the herd can lead to herd bias – one of the five common trading mistakes traders make.
Ask anyone who has successfully tried trading against the herd and they will tell you that it can feel scary when your analysis leads you to an unpopular bias. But sometimes, it pays to go against the herd and be the odd one out, the contrarian.
Illegal trading It is a Forex strategy that favors going against the current market bias in anticipation of a shift in market sentiment. It involves buying the currency when it is weak and selling it when it is strong.
Contrarian traders try to take advantage of moments when markets are drifting with strong momentum.
When everyone and everyone is ready and willing to raise prices, it can sometimes lead to overvalued assets. Likewise, when everyone is intent on selling an asset, opportunities to buy at an equal price arise.
One of the main benefits of contrarian trading is that it allows you to get good prices and spot reversals as soon as they start. In turn, this often results in very attractive reward-to-risk ratios, giving you more bang for your buck.
However, contrarians trade against the trend, and this does not always work in their favor. As the saying goes, “the trend is your friend,” but it can be a mean son of a gun when you fight it.
When a trend is particularly strong, it can break down, throwing away potential reversal points and sweeping away those going against the grain.
In no way am I saying that you should buck the trend just for the sake of it.
I'm just saying that if you have sufficient reason to believe that the market is about to turn, after conducting thorough fundamental and technical analysis, do not be afraid to go against the herd and take a contrarian position.
Remember, you don't always have to go with the flow; Many profitable business opportunities arise from staying away from others.
But always keep in mind that although contrarian trading can be rewarding, it is not without risk.
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