Day Trading Using a Contrarian Strategy
Momentum day traders buy stocks and bonds when prices are rising and sell when prices are falling. These traders figure that something that goes up in price will continue to go up, and something going down will continue to go down. Momentum trading is one strategy, and it works well for many traders, especially in a strong bull market.
Contrarian trading, on the other hand, is just the opposite of momentum trading, and it can work well, too. The logic behind a contrarian strategy is that nothing goes up forever; for that matter, nothing falls forever, either.
The contrarian trader looks for assets than have been rising in price and sells them; she prefers to buy things that have been falling. The point is not to buy cheap or sell dear, but rather to sell what seems to be overpriced and buy what seems to be a bargain.
Contrarian traders may just be quick to spot when a trend ends; for example, they may buy on a rumor and sell on the news, jumping out right when everyone else is ready to jump in.
The people who use this strategy well tend to be bargain hunters in every aspect of their lives. They stock up on frozen vegetables when the grocery store has a once-a-year loss leader, and they sell their apartment if their neighborhoods’ real estate gets too hot. They have a nose for value and put that to work during the trading day.
Contrarian traders are fighting the trend, and that can work against them sometimes. This style favors people who know a market inside and out so that they know when to move against it.