What is a Contrarian in the Stock Market and Should You Be One?
★ SUMMARY ★
In this week’s episode what I’d like to share with you is the definition of a Contrarian and should you be a contrarian.
If you don’t know what a Contrarian is, at least in terms of the stock market, it’s someone who goes against the grain or takes an opposite side approach to what the majority of the people do in the stock market.
For example if everybody’s going along or going for the upside and assuming stocks will continue going higher, the contrarian would say, short. On the other hand, if everybody’s thinking the stock market is going to head lower, the contrarian or the opposing view would be for stocks to pop and go higher.
The contrarian approach is typically something that a lot of investors talk about is that “Oh, I’m a Contrarian, or I take the opposite of what the majority does”, and you might be wondering, “Okay, should I be a contrarian? And should I do with this way or that way? Or what is the best approach”.
First off, I do want to give you some insight, the thing is that you never really know where the full majority of traders or positions of people really are, you can see what’s happening with the market as looking at the charts and seeing the reflection of what’s happening with the effect, so if there’s a lot of buying happening, you can see that the stock market has been heading higher.
However, you never know if you’re going to get an influx of more buying coming in to the stock market, or if you’re going to get a lot of selling. Typically, the way I like to approach is looking at it like a rubber band or stretching things out.
Here, I have few rubber bands that are attached, so when I look at the market and when I’m looking at trades taking place and looking at the charts, I’m actually looking to see how far that stock or the market has been stretched and the further it’s stretched from the middle, so the middle would be right around this area.
Looking at the middle between my two fingers right here, you’re looking at how far is the stretch from that middle or center point, so think of that center point as a balance beam or an active balance or acting like a seesaw.
That would be your middle point right here, so what you’re looking for is how far is it being stretched from that middle or center point, if stocks are moving higher, you can see that it continues to stretch very high and then eventually things will come back.
The same thing on the opposite end of the spectrum, so if they’re pressing lower or stocks are selling off eventually things will pop back up and that is because it’s over stretched, either oversold or to the upside over bought.
What you’re doing if you’re a contrarian, is you’re seeing how far things are stretched from this rubber band or from this center point, right there. So from the center point right here if I did it this way, you can see how far things are stretched either to the right or to the left.
That’s really what you’re doing, is you’re looking to see if things are a little bit too high and stocks are moving to that upside, what you want to do now is be the contrarian and play it short because eventually things will come back down.
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