Trading Contrarian Strategies — Be Different, Be Great (2024)

Contrarian strategies trading is a great way to build up wealth. This method allows you to bank big money off others’ fear and greed.

Famous contrarian traders

There are many well-know contrarian traders that you most likely have heard of.

Warren Buffet is one of the most famous traders and he believes the best time to get in is when a stock has been beaten down.

Other notable contrarian investors like Keith Gill, known for his posts on r/wallstreetbets and YouTube videos, turned a $53,000 bet on GameStop into a near $50 million dollars.

Even George Soros, known for his shorting of the yen and pound, netted himself a nice $2 billion in trading profits!

Baron Rothschild, a British nobleman and member of the Rothschild banking family, said “the time to buy is when there’s blood in the streets.”

What are contrarian strategies?

Contrarian trading is simple. You go against the market trends.

This means you sell when others buy, and you buy when others are selling. Many famous traders have made a living off of trading like this. Warren Buffet, for example, is one of the most well-known traders to use this method.

Contrarian traders think a little differently than others do. They don’t trade based on fear and greed like many traders hoping to get rich quickly do.

So the opposite of a contrarian would be someone who goes with the flow and trades like everyone else.

Contrarian theory explained

In short, this refers to if everyone believes that a sure thing will take place, then it won’t.

For example, most traders trade a specific stock thinking it will go up. A contrarian trader will trade against them in hopes to cash in on the fear of others when the stock starts to level out and make a downturn.

Since we know the basics of a contrarian trader, how can we become one and profit from traders fear and greed?

Let’s get started!

This strategy is great with Forex, Stocks, Cryptocurrency or Futures.

What Indicators are best with contrarian trading strategies?

There are many significant indicators that you can use, like MACD, RSI, or Moving Averages.

For the sake of simplicity, we actually will not use any indicators with this strategy.

So you can use those contrarian indicators, but they are not needed if you follow this strategy.

Trading Tools Needed

You need one drawing tool.

The trendline.

A trendline can be used on any of the most popular trading platforms out there.

It’s a universal tool, and if you need to learn more about this tool, you can always read this article that shows you a great way to trade with trendlines.

What time frame is best for contrarian trading strategies?

We will use a Daily Time Frame. You can use other time frames, of course, but we highly recommend you use a daily chart for contrarian trading strategies.

Rules for the Contrarian Trading Strategy

Now since we went over the basics of a contrarian trader, lets go over the rules of the strategy!

Rule #1: Go to the daily time frame on a stock that has been trending down for at least three months in a row.

In this example, we are going to use a stock. The ticker for this example will be $PYPL.

As we said earlier, you can use this method with any market to apply these rules to whatever you are trading.

We want at least three months because this means that many traders are starting to panic.

Panic is what you want with this strategy.

A great way to find these would be to search 52-week lows.

For Stocks, you could use this tool on yahoo finance

For Forex, you can use Barchart’s 52-week low tool here

For Cryptocurrency, you can use Tradingviews crypto screener and filter “52 week low”

Rule #2: Draw your trendline and be patient

Drawing a trendline can be incredibly simple.

But to make sure you know exactly how to do this, check out the trendline article here so you can do this effectively.

The trendline should look something like this.

In this case, it has already broken, which is excellent news for us because now we can go to rule #3

Rule #3 Price Breaks trendline

This rule is simple.

You wait for a daily candle to break your trendline.

To constitute a break, the price needs to close out the daily candle above the trendline.

Rule #4 Wait for sideways movement

Remember, there has been a lot of fear over the last several months, so many traders are looking at a trendline break, hoping it will go back up.

This is where an intelligent contrarian investor holds out because contrarian investors don’t get in when everyone else does.

Most will get back in when a trendline breaks so we need to wait for a sideways move and get in when others are not interested anymore.

When a pair, a stock, or a crypto goes sideways, traders tend not to pay attention to it anymore.

This is when the contrarian trader strikes!

Rule #5 Get in when the sideways move breaks!

You can do this by either drawing an additional trendline or just watching price action, as it will be easy to spot.

Once you enter your position, it is time to place your stop loss.

Rule #6 Stop loss placement and when to take profit

Traders should always consider using a stop loss.

The stop-loss placement should be a few dollars below the lowest price.

As you can see in this example, the stop-loss is set at $176 since the low was $179.15

For a take-profit target, we recommend you trail your stop-loss. If you are not sure of how trailing stop losses work you can read this ultimate guide to stop losses to help you better understand this.

Move your stop-loss to break even once the price goes up 10% from your entry.

Since this is still an active example at the time of writing this article, if you look at the image above, if price goes up 10% you will move your stop to where you entered. This takes ALL of the risk off of your position and you can enjoy watching it move! This also helps you in case price does start to move back against because, remember, this is a stock that has been beaten down. We dont want to be holding this forever, we simply are trying to find the bottom and getting in before all the other investors do.

There are many options, but we recommend you hold this position long-term to at least its all-time high.

Enjoy watching everyone else get in after you and drive this stock up to 50%, 100%, and more.

The goal here is to get in a position where you will be able to hold it as it continues its way back up to its previous all-time high.

In our example above, the trade actually has not triggered yet so this is a great real world example of what a setup looks like before it triggers (if it does)

Exceptions to rules

There are always exceptions to the rules.

What happens if a trendline breaks and then the stock continues to fall big time hitting all time lows as it goes down?

Easy, we dont get in and wait for another trendline break + sideways move on that Stock.

A sideways move is not one or two daily candles. A sideways move is a good 5+ candles of just sideways movement.

So if you see a +10% daily candle dont get all excited like many traders would do. Wait for it to settle down and traders will forget about it if its moving sideways. That’s when you get in!

We are not going to take on that risk of getting in when everyone else thinks its going to go up only to fall right back down. Many call that a “dead cat bounce” which is a completely separate topic.

Contrarian Examples

This is an example on the AUDCAD pair. So this Contrarian Forex Strategy works great as you can see

A good Cryptocurrency Contrarian Strategy example would be here.

So if you are looking for the best Contrarian trading strategy for cryptocurrency this is a great method to try! It is easy to learn and contrarian psychology is easy to understand once you start using this on a daily basis.

Contrarian Options Trading

You can use this strategy for options trading! Just follow the same rules and instead of getting share you get call or put options at the same level.

Contrarian Trading Forex

Using this to trade Forex is a great way make consistent profits if you keep your risk down. With this contrarian swing trading strategy, you will find out just how easy it is to go against the masses. After all, that is what the “big boys” do right? 😉

Before we conclude, you can use the exact rules above just in the opposite direction for a sell trade. Above, are all Buy trade examples because that is what we prefer, but selling can also work just make sure to follow the rules just in the opposite direction.

Contrarian Trading Strategy Video

We made a short video for you on this strategy that you can see here below!

Conclusion

Buying stocks, currency pairs, or crypto coins when they are continuing to hit lows is always risky. This is not really a contrarian day trading strategy, but you could try on lower time frames, we just prefer higher time frames. Remember to only risk what you can afford to lose. Do not risk your entire account on this position, as you could get burned quickly. If you want to learn the best risk management strategy you can always checkout our article on that here. You can also improve your trading longevity by checking out our article on risk of ruin.

Follow the rules and stick to your guns. Don’t get caught up in emotional trading, as this is one of the worst things traders can do. So if you are looking for the best contrarian trading strategies, the best contrarian investing strategy, and how you can become a contrarian trading master, then follow the above strategy!

If you enjoyed this article and would like to see us make a contrarian trading strategy pdf, be sure to let us know at info@tradingstrategyguides.com. We love hearing from you guys!

Thank you for reading!