Trading Success Secret: Timing Your Contrariness
People don’t like to be wrong. And people like to belong.
It’s not a bad rap lyric; it’s another hurdle that traders face. Investors and traders who want to keep one step ahead of the herd must fight against the natural inclinations to be “part of the group.”
And this herd mentality, or peer pressure, can doom your portfolio. When the world around you–and your trading buddies on message boards and chat forums–are saying that there’s still a lot of upside in gold, oil, tech stocks, or any other bubble-maker, you naturally resist moving the other way. This is how the bubble grows. And bursts.
The opposite is true, too, of course. Frightened investors will jump out of a position, or stay out of the market while momentum builds for a price movement.
So how do you avoid it?
There are a few ways to beat the bubble.
One way is to develop your contrariness. Resist the need to be part of the gang. Here are a few ways–psychological and technical–you can hone your contrariness.
Look for absolutes. When the majority of investors are saying that a trade “can’t fail” or “will always go up,” you know that the crowd has bit hard on the rotten apple of absolutes.
Measure averages. A technical way to check your contrariness, is to measure how far ahead of a position’s natural price average. An asset that is trading well above where it should be will eventually revert to the mean.
Ascertain support. Ask yourself if the fundamental reason for increasing (or decreasing) price still exists. Often the change is priced into an asset long before the trade takes off.
Leverage technology. Obviously, this takes time and effort. It’s a lot of research, too. Use whatever technological tools at your disposal to take the crowd noise out of your trades.
Related posts:
- Trading Success Secrets: When Sunk Costs Surface
- Automated Trading and Options
- Trading Success Secrets: Overdosing on Opinions
- Automated Trading and Futures
- Trading Success Secrets: The Good Times Roll Must End
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
