Traders tend to follow the current trend when investing in the stock exchange. They are not the only strategy that can help investors make handsome profits from trades. Contrarian investing strategies are very popular among traders. Are you curious about contrarian investing? This article will explain everything you need to know about contrarian investing.
Contrarian investing is a strategy an investor uses to counter the current market trend. Contrarian investing is when a trader takes a long position on a stock instead of taking a short position in a downtrend.
Now that you are familiar with this unique method of investing, let's explore the logic behind why traders choose to invest in contrarian strategies over following the flow.
Before we get into the details of such behavior, let us take a look at the general behavior of the stock market.
Contrary to popular belief, short-term stock price movements are driven by the sentiment of investors and other market participants. A stock that is viewed positively by the market is more likely to see a rise in price. If the stock is viewed negatively by the market, it will likely see a decline in price.
The fundamentals of a company are the primary driver of stock price movements in the long-term. A company that is fundamentally strong will have a high likelihood of its stock increasing in value over the long-term. Similar to the previous point, if the fundamentals of a company are weak, it would languish.
The stock market is unpredictable, as we all know. Market participants can make uninformed investment decisions in panic situations, even though they are well aware of this. Investors went on a massive selling spree when the COVID-19 pandemic struck the world and drove down stock prices. Even the most fundamentally sound stocks were not spared. Many people concluded that this was a poor time to enter the market because of their pessimistic feelings.
Contrarian strategies are a good option. Contrarian investors look for opportunities to enter markets in these situations, where most people would advise against investing. They look for companies that are fundamentally strong and have huge potential for future growth, but they've been hit hard by negative sentiments. These investors invest at bargain prices in these companies and then hold on to them until the market sentiment changes and prices rise. The contrarian investors then sell their holdings to reap multi-fold returns.
Contrarian strategies can bring investors much higher returns than if they follow the trend. Contrarian investing is a preferred strategy for many investors and traders.
Here are some things to keep in mind if you plan on going contrarian.
1. Don't follow the crowd: Do not blindly follow investors. Instead, think independently and do your research.
2. Negative market sentiments can be a great opportunity to purchase fundamentally strong stocks at rock bottom prices.
3. Long-term thinking: Contrarian strategies require a long-term perspective. It may take some time for stocks that have been beaten down to recover to their fair value.
4. Stay alert. Keep an eye on the financial performance of any company you have invested in. To minimize losses, exiting early is a smart move if a company you have invested in shows signs that it is losing its performance.
5. Keep calm and don't panic. Timing the market can be a difficult task. It is very difficult to buy stocks at their lowest point. It's like catching a falling knife. It is better to be calm and patient than panic and let it slide.
Contrarian strategies may not suit everyone. It may sound appealing on paper but it is not a guarantee of success. You are also at greater risk if you follow the flow than if you use a contrarian strategy. Before you enter a contrarian investment strategy, make sure that you thoroughly research the stock and market.