Tuesday, October 06, 2009

Habitual Contrarian Traders: Being Right vs. Being Profitable

Certain traders I've observed seem to be habitual contrarians. If the market is screaming higher and looking like a trend day to the upside, they're looking for places to sell. If the market is slow and rangebound, they're hunting for the next breakout move.

Instead of identifying what the market *is* doing and following that, habitual contrarians try to anticipate the *next* move. Interestingly, that next move is generally something different than the market is presently doing.

Habitual contrarians are trading a need to be right: a need to make big market calls. They are engaging in trading to feed their ego, not build their account statements. It isn't enough to go for the high probability trade; they want to call the turn or break.

Many, many good trades are decidedly unsexy. They involve buying pullbacks in an uptrend or fading low volume moves to a range extreme. Successful traders subordinate ego; in their dance with markets, they don't need to lead.

Theirs is a situation in which unmet needs from outside of trading conspire to sabtotage trading. I will be writing more about this shortly.

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13 comments:

TraderSmarts said...

Excellent post Dr. Dr Brett!

"Many, many good trades are decidedly unsexy. They involve buying pullbacks in an uptrend or fading low volume moves to a range extreme" - So true and basically what I do!

As I have mentioned before in comments I am mostly a fader. Either fading extremes for a potential change in trend or fading a countertrend move in the direction of a trend.

While I do anticipate potential market moves in advance the money is made by establishing if the market does A then I will do X and if the market does B then I will do Y. Trying to enforce my will on the market is a losing game.

OKL said...

Yep, couldnt agree more... my best trades are oddly, those trades that are "boring", my body doesnt tense up when i see them and its "just there for the taking".

Wasn't very smart today with the ES in the AM though =/

bala said...

Brett,

I'm suffering from this disease. Any recommendation on how to overcome this habit (trap)?

-Bala

Soberba Insônia said...

It´s strange to think that pros still fall into this trap.

It´s a so clear step about trading, which I´ve read in Steve Nison´s basic book about candles and it´s psychology behind, when he tells about the market is never wrong, and there are those who try to impose their will on the market and get all messed up their trades, because they don´t properly measure the forces on control.

He ends the article saying ´Be a trend follower, not a trend predictor´.

And there´s this passage as well, which he adapted from a japanese book:

´Buying or selling from the beginning without knowing THE CHARACTER OF THE MARKET is the same nonsense as a literary man talking about weapons. When faced with a large bull or bear market they are sure to lose the castle; what seems safe is infinitely dangerous...

Waiting for just the right moment is virtuous and essential´

F said...

There is much truth in this post, but is it the whole story? I read somewhere some time ago (is it here?, I can't recall) that traders who have no problem with authority are good at trend following. Traders who are more of the rebel type tend to be contrarians, counter-trending, etc... Maybe something to look into.

It may all well be "in the eye of the beholder," at the way we look at things. When I look at a correction during a up trend, I don't see buying opportunity; I am looking for signs that the trend is reversing. Like those ink blotches psychologists like, we probably all see different things when we look at the same chart.

Radek said...

For some of us, this goes back to childhood rebellion against the father (i.e. the Oedipal complex).

It would be interesting to see if the habitual contrarian traders are more atheistic than trend followers. haha

Just a hypothesis. :)

aviat72 said...

Dr. Brett:

I am curious to know why you feel that people who like to trade counter-trend, i.e. the reactionary waves are trying to prove that they are right?

Like trading the impulsive wave, trading the reactionary wave also boils down to trading discipline and honoring your stops and profit targets.

In some ways, trading the reaction to the impulse after a topping (bottoming) pattern, near points of resistance(support) is technically easier. The recent highs(lows) offer very well defined stops close to the position entry. The target profit points (e.g. Fib retrace level of the preceding impulse move,or previous highs(lows)) are also clearly defined.

I do agree that in a strongly trending market the overall profit opportunity may be significantly less compared to traders who can successfully ride large (and long) impulse moves. But even during this mega bull market, not many traders have ridden the full extent of the impulsive moves.

I am looking forward to more details on the weaknesses you have observed in the behavior of counter-trend traders.

BalaB said...

The need to be right is definitely prevalent amongst retail trading blogs. If the past 18 months have proven anything, learning to trade in that environment is financially deadly.

TraderSmarts said...

It seems like people are confusing what Dr. Brett is saying. I get the impression from reading the comments that some think Dr. Brett is sayin unless you are a trend follower you suffer from the need to be right.

IMO that is not what he is saying. I think what he is saying is that if you subordinate profits for the need to be right you suffer from this.

I think the basic premise of the entire post can be summed up as "Don't try to enforce your will on the market, instead take what the market is giving at any given moment".

warrenmyer said...

Dr. Brett,
This is an outstanding post. At first it did not seem to apply to me, because I have no issue in admitting that I am wrong and am very sensible with my stop losses.

However, I noticed that I had a built in pattern to go for major trend changes more often that the data warranted. As a result, I was often getting stopped out. In addition, I was setting my profit targets to be much larger than I should have. As a result I was even though I was often right, the counter trend did not last long enough to hit my profit targets and I was stopped out.

In addition, I had the habit of initially setting the profit targets to be too big and then reducing them as the trade started moving against me.

The changes that I have made is to focus more on trading the trend. If I am fading the trend, I am setting more realistic profit targets to get out of the danger zone quickly while still holding a % of trade for the BIG one!!

The takeaway for me is that rather than trying to always hit for the fences, I need to hit a lot more singles and doubles to improve my batting average.

JimRI said...

As an engineer, I suffer from this matter of needing to "be right." In trading, 6 of 10 trades can be loosers and you still make money. in fact one must be OK with that. But as an engineer we can not have 6 of 10 bridges fall down, or 6 of 10 airplanes fall out of the sky. So I, like most engineers, have to adjust our long established responses to things going wrong if we are to be successful traders. For me this is not stuborness it is just the drive to do a good job. So, I tend to not get into potentially good trades and miss a lot of opportunities. I don't hold them when they go negative.

j said...

Well Doc, you have written in Enhancing Trader Performance, that everyone should find his trading niche, and this is my niche, being contrarian .

Cristo said...

There is nothing wrong with being a contrarian trader. It is actually very profitable, but like any other strategy, only if you have a predefined plan with good risk control. Don't try to fight your personality if that's what you like to do. It will only frustrate you and you will eventually come back to what you like to do: go against the moves you see on the screen. Work on finding a plan that works for fading or contrarian moves, test that plan and get better at it. I personally use Fibonacci levels to identify market turns and its a profitable strategy if used with strong rules.