Why the contrarian can be just as wrong as the crowd

Contrarians have a brilliant reputation. Sometimes it seems as if they are the only ones that can make money trading the financial markets. But what people don’t see quite as much is that contrarians can be just as wildly, hilariously wrong as many a normal trader. In fact, I’m here to argue that they can be even more wrong.

When the normal trader makes a decision as part of a crowd, client sentiment leans towards far more long than short orders. When there are far more long orders than short orders, the bid price goes up, and sometimes the offer price may go down as well. Therefore, as part of a crowd, the average trader is somewhat likely to make money.

However, a contrarian can be a lone bull in a field of bears or vice-versa. His or her order won’t really change anything and therefore things can go wildly wrong for them if they make a huge error in judgement. Moreover, contrarians can be just about anybody – they don’t have to be economists with a university degree to be classed as such. In fact, contrarians can be just as wildly inept and clueless as I was when I first started trading.

Sometimes they can just be so stubborn that they will go against the crowd, and, contrary to popular opinion, they don’t always get it right.

By Shrey Srivastava

A finance and economics enthusiast, and someone who wants to share his views with the world.

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