Trading often requires contrarian thinking and being able to make contrarian trades requires a sound trading psychology. The psychology of contrarian trading is nicely illustrated by Audi. As reported recently in Business Week, Audi is putting large amounts of money into marketing and advertising while other companies in the declining auto industry have been scaling back. In fact, Audi has increased its spending on marketing by 20%! How can they do this when the US auto industry has been in severe crisis requiring aggressive government intervention on multiple fronts?
"We took the crisis as a huge opportunity," said the Audi management board member in charge of marketing. Contrarian thinking followed by highly committed contrarian actions. They have a strong goal: to be the leading premium auto brand in the next 5 years.
How many traders think and act in a contrarian manner? Not many I'd bet since 90% or more of all traders fail at trading. From this statistic (industry generated, not mine), it seems like everyone is thinking the same way and doing the same things. This is "herd mentality."
So, how can you use Audi's example and become contrarian? Here are a few tips:
1. Come to the market with a trading plan. Most traders don't have a plan built around high odds trade set ups. Thus, they trade random patterns.
2. Put in the necessary work. You can't be like most traders and just show up to the markets expecting to make big money in a short period of time. Don't be like most traders; become contrarian. It takes hard work and study. Prepare yourself to trade well.
3. Enter on reactions, not on breakouts. Most traders see the market begin to move and then jump in. These dog-piling events are made-to-order for professional traders to act. They unload when the herd is buying, and stock up when it is selling. Adopt a professional's attitude and look to sell into strength and buy into weakness.
4. Work on the mental side of trading, not just the technical side. Understanding how to read the chart is vital, of course. But it is not enough. Once the technical side is learned, trading becomes 100% psychological. Most traders think psychology is unimportant until it is too late. Be contrarian and put time in to learning the mental skills needed to trade well.
5. Keep learning. Not just about the markets but about your own performance, too. Most traders take a losing trade and sweep it under the rug. They try to forget about it. Likewise, they don't bother to study their winning trades. They have little idea of why one trade worked and another didn't. Be contrarian: review your trading and keep a journal.
Becoming contrarian is not just mindlessly being oppositional. Audi has an important goal it is aggressively following. Audi isn't swayed by what other car makers are doing or how they are acting. Being contrarian is adopting a unique and divergent stance toward the markets. It is a trading psychology that says, "I will do things differently from all the others who are failing." It is a very wise trading psychology that comes from the smartest traders in the business-the professionals.
Source : enzinearticles
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