Contrarian Trades: What Are They and When to Take Them?

Filed under: Learn Forex Trading |

 

Trades that go against the recent trend and momentum in the forex markets are commonly known in the as ‘Contrarian trades’. ‘Contrarian’ means to take an opposing view, and in the forex markets this means doing the opposite of what everybody else is doing.

 

As a contrarian trade does the opposite of what everybody else is current doing, this is a dangerous trade to make. You are in effect gambling that everybody will have a change of heart at the same time, and that the market sentiment will go from one polar extreme to the other. However, there are situations when a contrarian trade makes total sense – but you must take these opportunities sparingly.

 

When there is a very strong level of support/resistance in the market (namely – on the daily chart), then this could be an area to look out for any price action setups that might initiate a contrarian trade. Firstly, the level of support/resistance must be a very strong one. If it is not, then you should forget about making any contrarian trades. But it is not enough simply to have a strong area of support/resistance. Price has to also form a very strong price action signal (in the form of a pin bar or engulfing pattern) in order to confirm that a contrarian trade can be taken.

 

Once price has formed a strong price action signal going against the trend at a very strong area of support/resistance, this provides a very good opportunity to make a contrarian trade. However, the price action signal must be particularly strong. For example, if it is a pin bar, it should have a very long tail and should stick out like a sore thumb on the chart. If it is short and not prominent, then forget about it as market momentum is a powerful force and should not be toyed with unless the setup has equal strength.

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