Trading can involve different styles and methods. An individual can make use of any of them that works well according to a certain set of trading preference. 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.

Basic Definition

Contrarian trading is just one of the styles that traders can use. It is the opposite of trend following in most cases in that this style usually involves going against prevailing market trends. It is usually characterized by buying assets while they are performing poorly and then selling them off when they perform well.

Contrarian Trading Advantages

One of the advantages of contrarian trading is that it usually targets those assets about to make a turning point in price. This turning point usually begins at a new trend. Contrarians usually take to such turning points early in the trade which can result in handsome earnings or profits if caught on effectively. Traders who follow a trend usually wait before a certain asset becomes more established on a certain trend before making trades.

Another advantage is that most contrarians try to exit positions early, right before they incur considerably steep losses. Those who follow the trend usually have to wait to see an established trend before they make a move. They sometimes even wait before the trend changes direction hoping that the market picks up. This can sometimes happen only after they have already acquired a considerable loss in terms of the differences between the selling and the buying price of their assets.

Contrarian Trading Disadvantages

One of the disadvantages of contrarian trading is that 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.