Stock trading and investing can sometimes be risky. The risk increases when you don’t have an idea what you are doing. Some people invest in stocks simply by following what is popular. This can be a mistake. Stock trading can involve different styles and methods. Anyone can make use of any of the methods that work well for them based on certain preferences for risk. But it also pays to know what some of these methods and styles are in order to have a better grasp of what can be used. One of them involves contrarian trading
What Is It?
Contrarian trading is just one of the different trading styles used in the market. Basically, it is the opposite of following trading trends. In most cases, this style usually involves going against prevailing market trends. This method is usually characterized by buying assets or stocks while they are performing poorly in the market and then selling them off when they start performing well.
One of the advantages of contrarian trading is that it usually targets those assets that are about to make a turning point in its market price. This turning point is usually the start of a new trend. C ontrarian traders usually take positions on such turning points early in the trend, which can result in handsome earnings or profits if caught on effectively. Most traders who follow a trend usually wait before a certain asset becomes more established before taking positions.
Contrarian Trading Disadvantages
One of the disadvantages of contrarian trading is that it can sometimes veer too much going against the trend does not necessarily work all the time. It can also be quite difficult to predict those turning points and believe them to be going in the same direction in the succeeding days. The challenge posed by markets is that they can be pretty unpredictable and don’t usually follow a certain direction most of the time. Early entries and exits as characterized by contrarian trading can also mean not being able to further benefit from trading in the long-term.