Contrarian strategy trading is a great way to accumulate wealth. This method allows you to draw a lot of money from the fear and greed of others.
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Famous contrarian traders
There are many well-known contrarian traders that you have most likely heard of.
Warren Buffet is one of the most famous traders and believes that the best time to enter is when a stock has been knocked down.
Other prominent contrarian investors like Keith Gill, known for his r/wallstreetbets posts and YouTube videos, turned a $53,000 bet on GameStop into nearly $50 million.
Even George Soros, known for his short sale of the yen and pound, earned a whopping $2 billion in trade profits!
Baron Rothschild,
a British nobleman and member of the Rothschild banking family, said that “the time to buy is when there is blood in the streets.”
What are contrarian strategies?
Contrarian trading is simple. It goes against market trends.
This means that you sell when others buy and buy when others are selling. Many famous traders have made a living from trading this way. Warren Buffet, for example, is one of the most well-known traders to use this method.
Contrarian traders think slightly differently than others. They don’t trade on the basis of fear and greed like many traders do who hope to get rich quick.
So the opposite of a contrarian would be someone who goes with the flow and trades like everyone else.
Explanation of contrarian theory
In short, this refers to if everyone believes that a sure thing will happen, then it will not.
For example, most traders trade a specific stock thinking it will go up. A contrarian trader will trade against them in hopes of cashing in on the fear of others when the stock begins to stabilize and make a decline.
Since we know the basics of a contrarian trader, how can we become one and profit from traders’ fear and greed?
Start!
This strategy is great with Forex, stocks, cryptocurrency or futures.
Which indicators are best with contrarian trading strategies?
There are many significant indicators you can use, such as MACD, RSI or moving averages.
For simplicity, we will not actually use any indicators with this strategy.
So you can use those contrarian indicators, but they are not necessary if you follow this strategy.
Necessary trading tools
You need a drawing tool.
The trend line.
A trend line can be used on any of the most popular trading platforms out there.
It is a universal tool and if you need to know more about this tool, you can always read this article which shows you a great way to trade with trend lines.
What is the best time frame for contrarian trading strategies?
We will use a daily time interval. You can use other time frames, of course, but we strongly recommend using a daily chart for contrarian trading strategies.
Rules for contrarian trading strategy
Now, since we’ve looked at the basics of a contrarian trader, let’s go beyond the rules of strategy!
Rule #1: Go to the daily time frame on a stock that has been trending downward for at least three consecutive months.
In this example, we’ll use a title. The viewport display pane for this example will be $PYPL.
As we said before, 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 them would be to look for 52-week lows.
For stocks, you can 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 weeks low”
Rule #2: Draw your trend line and be patient
Drawing a trend line can be incredibly simple.
But to make sure you know exactly how to do it, check out the trendline article here so you can do it effectively.
The trend line should look like this.
In this case, it has already broken, which is great news for us because we can now go to rule #3
Rule #3 Price Breaks trendline
This rule is simple.
You wait for a daily candle to break your trend line.
To constitute a break, the price must close the daily candlestick above the trend line.
Rule #4 Wait for lateral movement
Remember, there has been a lot of fear in recent months, so many traders are looking at a trend line break, hoping it will rise again.
This is where a smart contrarian investor resists because contrarian investors don’t come in when everyone else does.
Most will come back when a trend line breaks, so we have to wait for a sideways move and enter when others are no longer interested.
When a pair, stock, or cryptocurrency goes sideways, traders tend not to pay attention to it anymore.
This is when the contrarian trader strikes!
Rule #5 Enter when lateral movement breaks!
You can do this by drawing an additional trend line or simply observing the price action, as it will be easy to spot.
Once you have entered your position, it’s 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 minimum was $179.15
For a take-profit target, you’ll want to follow your stop-loss. If you’re not sure how trailing stop losses work, you can read this ultimate guide to stop losses to help you understand it better.
Move your stop-loss to break even once the price rises 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 the price goes up by 10% you will move your stop to the point where you entered. This takes ALL risk out of your position and you can enjoy watching it move! This also helps you in case the price starts to go back because, remember, this is a stock that has been knocked down. We don’t want to keep it forever, we’re just trying to find the bottom and get in before all the other investors.
There are many options, but we recommend that you hold this position for the long term at least at its all-time high.
Enjoy watching everyone else come in after you and drive this stock up to 50%, 100% and more.
The goal here is to get to a position where you’ll be able to hold it as it continues its way to its previous all-time high.
In our example above, trade hasn’t actually activated 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 trend line breaks and then the stock continues to fall in a big way hitting all-time lows as it falls?
Easy, we do not enter and wait for another break of the trend line + sideways movement on that stock.
A lateral movement is not one or two candles daily. A side move is a good 5+ sideways movement candles.
So, if you see a daily candlestick of +10%, don’t get excited like many traders would. Wait for it to stabilize and traders will forget about it if it moves sideways. That’s when you come in!
We will not take the risk of entering when everyone else thinks it will go up only to fall right away. Many call it a “dead cat bounce” which is a completely separate topic.
Contrarian examples
This is an example about the AUDC pair. So this Forex Contrarian strategy works great, as you can see,
A good example of a contrarian cryptocurrency strategy 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 it on a daily basis.
Contrarian Options Trading
You can use this strategy for options trading! Just follow the same rules and instead of getting sharing you get call or put options at the same level.
Contrarian Forex Trading
Using this to trade Forex is a great way to make steady profits if you keep your risk low. With this contrarian swing trading strategy, you will discover how easy it is to go against the masses. After all, that’s what the “big guys” do, right? 
Sales rules
Before concluding, you can use the exact rules above in the opposite direction for a sales trade. Above, there are all examples of buying and selling because that’s what we prefer, but selling can also only work by making sure you follow the rules in the opposite direction.
contrarian trading strategy video
We have made a short video about this strategy for you that you can see below!
Conclusion
Buying stocks, currency pairs or crypto coins when they continue to touch lows is always risky. This is not really a contrarian day trading strategy, but you could try on lower time frames, we only prefer higher time frames. Remember to risk only what you can afford to lose. Do not risk the entire account on this position, as you may burn yourself out quickly. If you want to learn the best risk management strategy, you can always check out our article on this here. You can also improve your trading longevity by checking out our article on risk of ruin.
Follow the rules and stick to your weapons. Don’t get involved 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 investment strategy and how you can become a contrarian trading master, follow the above strategy!
