“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms, and you make all your money by playing the trend in the middle. Well, for twelve years, I have been missing the meat in the middle, but I have made a lot of money at tops and bottoms.” – Paul Tudor Jones
It can be tricky being a contrarian. Standing against the crowd and the trend is never the easiest of pursuits. And let me guess, you were taught:
“The trend is your friend”
So, why would you even bother trying to go against it?
Because, for some traders, picking tops and bottoms is where big money can be made, and you don’t even need to be that great at picking the market. You just need to be excellent at risk management.
If you’re following the trend, you need to do it better than the majority of other traders who are doing the same thing.
As a contrarian, marching to the beat of your own drum, you will be in first on the new trends, and you will be well in profit by the time everyone else realizes the trend has changed.
Being a contrarian requires exceptional risk management skills
“Losers Average Losers” – A poster on the wall of Paul Tudor Jones’ Office
If you are constantly taking positions against the trend, you are often going to be wrong. You are not relying on being right, as a contrarian. Instead, you are relying on making the most out of the times when you are right, and minimizing the cost when you’re not, because it’s generally going to take you a few goes.
To do this well, you need to:
- Keep the initial risk small
- Learn how to scale in, and build a large core position
That way, if the market does go for you, then you can have some big win. If it goes against you, then your losses are small. This is the epitome of good trading.
Iron discipline is a prerequisite
Of course, this type of trading style is not for the faint hearted. You need to be very clear on your objectives for your positions, and you need to have the confidence and discipline to stick to your guns.
You should also be highly organised in your approaches, as well as flexible in knowing when you are wrong.
Why I wrote this post
I actually think this trading style is well suited to retail FX traders, because, as a retail trader, your small size allows you to be much more flexible in your risk management than your institutional counterparts.
Being a contrarian allows you to maximise your advantages. It’s important that you realise the power of what can be done. You should not be put off by the fact that it is going to take you a few goes to get in on a turn.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).