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The Art of Contrary Thinking -
You Need to know it to Trade
Successfully!
The art of contrary thinking is one of the
most powerful tools a trader can use, and is a trait with which all true great
traders are familiar.
What is the Art of Contrary Thinking?
The art of contrary thinking consists in training your mind to ruminate
in directions opposite to general public opinions; but basing your opinion in
the light of current events and human behaviour.
Humphrey Neill's book,
"the art of contrary thinking," the best known work on the subject, is based on
the simple yet powerful idea that:
"'When everybody thinks alike,
everybody is likely to be wrong'"
Why Contrary Trading Works
By spotting situations when the consensus is either extremely bullish
or bearish, then a trend change is imminent, as it is likely the emotions of
greed and fear have pushed prices too far away from true value.
This is
evident in such events as the 1987 stock market crash.
Here we have a
short-term, self-fulfilling prophecy. When the change occurred, everyone
changed his or her mind at once, causing a huge move.
Of course, if you
can step aside from the crowd and take a contrary view at these turning points
you can make big profits.
Why Contrary Thinking will always be Valid
While Humphrey Neil's work, "the art of contrary thinking," (published
in 1954), is the most famous book on the subject, there existed a century
earlier a book on contrary thinking.
Charles MacKay's book,
"Extraordinary Popular Delusions and the Madness of Crowds," (published in
1854), covered three important financial crashes:
he tulip mania, the
Mississippi madness, and the south sea bubble. He reflected upon how investors
always pushed prices too far when caught in a consensus:
"Men, it has
been well said, think in herds; it will be seen that they go mad in herds,
while they only recover their senses slowly, and one by one."
It is
clear that to succeed in trading you need to think independently of the
majority at important market turning points.
Becoming a Contrary
Trader
Gann was one of the greatest traders and traded in the early
20th century. He realized that human nature would always mean that you had to
think independently of the crowd to succeed.
"We cannot escape it
(emotion). In the future, it will cause another panic in stocks. When it comes,
both traders and investors will sell stocks, as usual, after it is too late, or
in the latter stages of a bear market".
He was aware that human nature
was constant and influenced the majority of traders:
"Therefore, in
order to make a success, the trader must act in a way to overcome the weak
points that have caused the ruin of others"
How to Predict a Major
Change
Gann was not just a writer; he was a successful trader and had
an extraordinary record of accomplishment in the stock market, for example:
Gann used to publish a forecast for the following year. In 1928 he
published a forecast which predicted the date of the September 1929 US Stock
Market High, and that a Black Friday would occur, a year in advance of the
actual events.
In 1932, he also recommended buying stocks at the all
time low in the Dow in June and July.
Gann was one of the most
successful stock market investors ever, and developed a strategy to set him
apart form the crowd, and simply let market action indicate where prices were
going.
Learn More about a Legendary Trader
Why not attend
one of our FREE Seminars held in London and cheshire.
click here to book on-line or telephone 0161
285 4488.
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