3 Principles of the diligent contrarians

As we approach new highs in markets and stocks (I started writing this a couple weeks ago) and as people are ever more vocal it is important to talk about contrarianism (that is a real word, Bing it).  Or maybe it is just the season or astrology or whatever.  I wrote the difference between a Contrarian and and an Idiot last year about this time.  But let me be a little more hopeful.

Let us agree on a few thing:  Trends do end and markets do not go straight up forever.  Markets rotate.  But at some point people find something else they like or they should.  If they do not have an exit in mind it will always be their stop.

Here are three principle of the diligent contrarian:

Never take a position you can’t argue the other side.  When the evidence is so compelling that you fail to see the other side you are missing something.  Contrarians see both sides and let price dictate which view is winning.  Also it must fit within their strategy.  Most people can look at a chart and have some idea of where it is going but it does not always fit within their strategy.  That is part of trading.  Not every opportunity is the same but their are many opportunities.

Be prepared to miss it on the wrong side.  If you have ever played golf, in putting, you know that the object is to make it but if you are going to miss it, miss it on the right side.  Meaning the side that has a chance to go in.  If the green slopes right miss it on the left side of the cup. If you are going to miss the distance, miss it long.  When being an contrarian you are trying to jam the ball in the center of the hole.  If you are wrong you pay for it but you are also rewarded when correct.

Looks at it as a series of trades.  There are two camps when it comes to what to do when a signal is generated.  Some say take every trade but not everyone is in that position.  Maybe you can only trade 2 lots.  If you can trade 10 lots I would say take every trade.  However, I would never take a trade or at least near my max risk per trade if everything was not lining up, I was not trading well,  was not up a good chuck of money and was not prepared to lose money.  Be prepared to take loses as a contrarian.  Some people are not ok with “missing it on the wrong side”.  Build your position.  Let the position blow out small until it works or price says otherwise.

Higher risk, higher reward.  Opportunity costs are real. What is your take?  

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