Making money as a contrarian

Of course in the opposite situation the reasoning is reversed to the previous example, however the explanation is analogues. So, in a falling market your first (opening) trade will be a sell. As a result you'll have a 'short' position.
Besides this way of riding the waves, you can also make money as a contrarian. This means that you act in an opposite direction then others (the market) do.

Contrarian is usually used as an investment term, and is derived from the social contrarian, which can be defined by an attitude of going against the establishment in terms of the social mores of the time. A social contrarian attempts to show to others, like Plato through Socrates, that there is something inherently wrong with their limited view at the world.

If you then take that definition and substitute social for trading I think you'd get a good idea of what is a contrarian trader. Now I'm not necessarily advocating being contrary for the sake of being contrary, but ask yourself who gets the best rewards: the trader that does the same thing as most other traders or the trader that goes against the herd (at the right time)?

Rules to follow

Therefore to become a good (contrarian) trader make sure to be:
- Assertive (If a contrarian doesn't ever follow his opinion, what good is the use of having a contrary opinion?)
- Open minded (It's important to remember that as the contrarian you are not always right, but neither is everyone else.)
- Market minded (As a contrarian it's easy to get caught up in the contrary point of view, but ultimately you have to do what's best according the future of the market, not just what's contrary.)
- Non-linear (This is one of the biggest ones. In order to truly be of value as a contrarian, you can't just point out the faults of an idea, but need to come up with an other idea, and to come up with a viable alternative that is not obvious and counter intuitive, requires excellent non-linear thinking.)

So to really act as a contrarian trader, there is one basic condition. You need to be able to set up both long and short positions. Otherwise you can not profit by this means. Luckily, with DGCX already and DME later this year, you will be able to sell futures short as well as that you will be able to buy futures and therefore go long. With these two commodity futures exchanges you can execute an eventual function as contrarian.

Of course it is very important to have the exact and correct timing. Timing however, is one of the most complex things in being a trader. To explain you here 'how and what' would unfortunately be too extensive. How to cope with timing can't be explained in five minutes, nor can it be described in ten lines.

Market timing

Once the time is right, you can profit of an extremely significant price jump (or fall). Therefore trading as a contrarian is especially interesting for day traders. Moreover, because financial markets always overreact. So a retracement (technical term for pull back to the level of the breakout) for example might be near.

You can even make money trading as a bear in a bull market, which is also a form of being a contrarian. Simply because markets never go up in a straight line, there are always some downward moves. Picking the right moment to sell short you can scalp this initiative by buying back your short at a lower level, even before the markets continues its rise. For there will be some sort of a saw-tooth figure in every trend.

To determine the exact moment to set up your position that is contra with the market direction so far, you can use technical analysis as a decision supportive tool. But more important is to really understand the psychology of the market to be able to develop sensitivity for these turnarounds. This can only become your second nature by training. And I mean training a lot. Investing and trading in financial markets is just like sports. To become really skilful, you have to work hard, gather knowledge and be able to act upon the right moments.