In today’s article, I want to spend a little bit of time talking about how essential it is to be a contrarian thinker when trading the forex markets.
All the great traders you’ve read about in books were contrarian in the extreme, these traders were willing to take positions in the market which no one else would, it takes alot of courage to go against the masses and do your own thing, the majority of traders simply copy what they see everyone else doing, whether that be trading the same strategy or taking the same outlook on the market.
Over the course of the article we’ll take a look to see if your currently a contrarian thinker, if you’re not then I’ll show you how to become one by understanding how retail traders overall trade the forex markets, towards the end of the article I’ll explain why following the opinions of others is dangerous and is likely to lose you money should you decide to take trades based on what other people believe about the market direction.
Are You A Contrarian ?
The majority of forex traders believe themselves to be contrarian when trading the markets.
They feel like they trade differently compared to other traders and when they place trades they believe they are taking a position in the market which few other traders are taking.
The problem with thinking you’re a contrarian is if everyone else also believe they are a contrarian.
If all traders believe they are being contrarian in terms of where they’re taking trades and what analysis they’re doing on the market then really they’re not a contrarian because everyone else also believes themselves to be a contrarian.
Lets say you trade price action at support and resistance levels.
Do you think by using this method you are being contrarian ?
I wonder how many other traders also trade price action at support and resistance ?
If you trade using the same methods as everyone else then are not being a contrarian.
The only way you for you to be a contrarian is if you trade a strategy which only you have access to or use the same trading strategies as everyone else but with a superior understanding of how the forex market works. If you have a better idea of how the market works then you can pick up on things other traders trading the same strategy can’t.
Alot of the trading strategies I use are implemented by a large number of other traders, the only difference between them and me is my knowledge of how the forex market works is greater than theirs, therefore I can identify trades which are unlikely to work out and take trades which the traders using the same strategy may not have picked up on.
If you have read my article “Supply And Demand Trading The Essential Guide” you’ll see the rules I implement in my supply and demand trading are very similar to the rules used by Sam Seiden and the vast majority of traders trading the supply and demand methodology.
The reason my rules differ is because my understanding of the market is better.
One of the rules used in common supply and demand trading is the stronger the move away from a zone the higher the chance the market has of reacting to the supply and demand zone when it returns.
To a new trader this rule makes sense, but if you dig a little deeper into how the forex market works you’ll see the main factor in determining whether a zone is going to work out or not isn’t how strong the move away from the level is ? It’s the location of the supply or demand zone in the trend. It makes no difference how strong a move away the area has, I’ve seen hundreds of zone which have had a strong move away failed to generate even the smallest reaction from the market and I’ve seen zones with a tiny move away reverse entire trends !
A new trader wouldn’t know this and would trade supply and demand using the same rules as everyone else, meaning they’re part of the “herd” as opposed to being a contrarian.
How To Be A Contrarian
To be a contrarian thinker in forex trading, means doing things differently to everyone else.
They only way to do things differently to everyone else is to know what everyone else is doing. If you don’t know how the majority of traders trade, then there’s no way for you to know if you’re trading in the same way or doing something different i.e being a contrarian.
This means the primary requirement to being a contrarian thinker is to understand how other people trade.
In trading, we do not want to make the same decisions as the masses as we know 90% of traders consistently lose money, therefore in order to not make the same decisions/mistakes as the ‘herd’ we must find out how the herd make trading decisions.
Figuring out how retail traders overall trade the forex market can be done by either making assumptions about them or by gathering data from factual sources.
The problem with making assumptions is they must be true for everyone and they must make sense.
If I was to say “all forex traders trade using supply and demand” then it wouldn’t be a very good assumption as we can easily find out a high percentage of traders trade using other strategies.
Now if I was to say most traders follow the trend then would be a factual assumption based on the evidence.
The trend is a concept paramount to most trading strategies and is something which is talked about in most trading books/courses, it makes sense to assume most of the retail traders in the forex market follow the trend as it is a concept which has been driven into them since the beginning of their time trading.
One of the best ways to gather data about how a large number of traders trade is by analyzing Oanda’s order book.
The order-book provided by Oanda is one of the few sources of information we have about the forex market which is based on fact, traders typically complain that if they were to have access to the order book found in the futures market they would be profitable as they can see the buy and sell orders coming into the market from all the various banks and hedge funds.
Since an order-book of this caliber does not exists in forex ( at least to retail traders ) then the next best tool is the order-book provided by Oanda.
Many people underestimate the knowledge you can gain from watching how the open orders and open potions graphs change over time.
The article I released last week “What Does Oanda’s Order-Book Teach Us About The Way Retail Traders Trade “ details most of the things I’ve picked up on in my time watching the open positions and open orders graphs change. The order-book is useful as it provides us with a means to understand how retail traders overall trade the markets. You would think by looking around online that the traders who are using strategies like price action – supply and demand – indicators make up the majority of the traders trading the forex market. By looking at the order-book you’ll realize these traders are the minority, not the majority as is commonly assumed.
This means the only way for you to figure out how the majority of traders trade is by studying the order-book.
Stay Away From The Financial Media
One of the things you must do in order to be a contrarian, is keep away from the opinions of the financial media.
If you watch financial news channels such as CNBC or Bloomberg what you typically see is people giving their opinions on where they believe the markets will go. These people will look like they know what’s going on in the markets, they’ll state their reasons for the market doing this or that and back it up with some small facts usually based on how the economy is performing.
Traders who watch these channels will take trades based on the opinion’s of these people under the impression their giving out solid trading related insights.
What the traders watching these channels fail to realize is these people are being paid by the news channels to give their opinion on the market, their not doing it out of the good of their heart, their doing it for money. It makes no difference to them if traders place trades based on their opinions and lose money, the only reason they’re talking on the channel is to make money for themselves !
If you do watch CNBC or Bloomberg I would advise you stop. Following the advice given out by these media outlets will only end up with you losing money. Thousands of traders watch these channels and believe the people on there are giving out decent quality advice when really their just saying anything they like because they know their going to get paid for it.
When it comes to finding out the latest financial news in the market another format traders use is websites.
Forexfactory, along with many others, have a section on their site dedicated to 24 hour news updates on all things forex related. Sometimes you’ll see reports from banks telling people which trades their looking to place and what technical levels to keep an eye on. A significant portion of traders will look at these releases and take the information provided by them as being legit, by that I mean the traders will believe what the bank is saying in the report because of the fact its coming from a large authoritative source.
I remember a few years ago back when the EUR/USD downtrend was just beginning to get underway a bank release came up on the forex factory news feed. I can’t recall exactly which bank it was, I’m pretty sure it was either JP Morgan or Goldman Sachs, in the release it stated that the bank was going to sell EUR/USD with a 100 pip stop-loss.
I’ve marked the point on the chart where the bank said to sell in the release.
It may not have been on the exact candle marked above but it was definitely during the consolidation marked between the two lines.
To the naive trader, a bank telling you to place a sell trade with a 100 pip stop seems like good advice, I mean its coming from a source you trust and believe in, it seems like the bank must know where the market is going to go otherwise why would they tell you their placing a sell trade ?
What the trader reading the report doesn’t understand is the reason the bank is telling you its placing a trade.
At this point the down-trend was not obvious to most traders, the market structure looked as though it could well develop into a consolidation rather than continue falling. The main motivation of the banks and hedge funds when the market is up here is to get as many sell trades placed as possible for when the downtrend eventually gets underway.
If you were planning to place a trade to sell 500 million EUR would you really go around telling other people where you plan to sell ?
The real purpose of the report was to get retail traders to place sell trades.
The banks know traders follow their reports, all they need to get a large amount of traders to either buy/sell is construct the report in such a way where the retail traders believe their making a good decision.
In this case the banks wanted to place more sell trades into the market, by telling traders they are planning to sell they automatically make a large number of retail traders sell as they believe the bank knows the market is about to fall.
Right now you may be thinking “but you just said the banks want to get more sell trades placed, how are they going to do that by getting retail traders to also place sell trades” ?
The answer is simple:
The release told traders to place sell positions with a 100 pip stop-loss, most traders would have followed this advice and placed a sell trade with a 100 pip stop. What the banks know about the traders who have sold that the traders don’t know about themselves is if the market moves against their sell trades the traders are unlikely to hold out until the market hits their stop.
When the market begins to go up, instead of down which is what the retail traders would have believed was going to happen, the traders start to be put under pressure to close their sell trades. Closing their sell trades puts buy orders into the market which will be used by the institutions to place more sell trades for when the downtrend begins.
When you see reports released by banks or other entities its easy to be led astray.
In example above what the bank said wasn’t technically wrong, the market did end up falling lower and had a trader held on whilst the market moved against him he would have eventually had a successful trade. The problem was the trader was never going to have the discipline to hold onto the trade in the first place, there was no way he was gong to be able to sit there and watch as the market moved further and further against his position. The banks knew this but the traders didn’t, so essentially the traders naivety was exploited by the banks for their own purposes, which in this case was filling additional sell orders before the downtrend began.
The essence of being a contrarian means to always do your own thing and follow your own opinion of the market.
Listening to the media either through the financial channels mentioned above or news updates on forex websites means you are being influenced by the opinions of others who you believe are more adept at trading than yourself. Always remember there is a reason a bank releases a report telling you where they believe the market is going to go, it’s never released to help you, it released to manipulate you into taking the wrong course of action.
My final message to you is this…..
If you want to trade successfully you must learn how to trust you own judgement, if you take the opinions or analysis of what other traders/banks are saying then you are not being a contrarian and will become part of the ‘herd’ who consistently lose 90% of the time when trading.