Great things are done when men and mountains meet. This is not done by jostling in the street.
The first thing you need to understand is that panic has no place in the markets. Failure to implement this law, and nothing, we or anyone says will help you.
Contrarian investing is all about controlling your emotions. In other words, you let logic rule, and you throw your emotions into the dustbin. Many experts claim this form of investing is hard to master, but the truth is that it is very easy to understand and implement. All you need to do is follow the simple rules laid below, and you will be on your way to becoming a more disciplined and successful investor. We strongly recommend that you take time to understand the basic principles of mass psychology. The topic of Mass psychology is covered extensively on our site.
These nine rules spelt out below will provide you with a solid foundation to build on. However, these rules do not cover every single angle on this subject. The two most important criteria are patience and discipline; without them, you will have a hard time succeeding in the markets no matter what strategy you choose to follow.
- Never panic: this is the master rule. If you fail here than nothing matters.
- Patience and discipline: these are two of the most important traits that you need to master, after the above rule. If you cannot master these two, you will fail with the rest. Thus, it is imperative that you understand that you cannot win in the markets if you are in a rush and lack discipline. You need to wait for sentiment to be euphoric, or the crowd should be in panic mode, before deploying large chunks of our money into stocks.
- All forms of traditional media should be viewed as toxic sources unless you are going to use the information in a contrarian manner; take a position that is opposite to what is widely popular. Use traditional media to get a gauge on what the masses are doing.. Emotions should be at the sweltering level before you decide to take action. Do not oppose the masses just because they have jumped on the bandwagon. One must wait until the bandwagon is overloaded and threatens to buckle under its weight before you head for the exits and plan on taking a position that opposes that of the masses.
- Come up with a strategy before you start playing with real money. Don’t be foolish and start hoping for a home run. Your only reward will be loss and misery. The plan should include profit targets on each and every trade, and, an exit plan, in case the trade does not work out.
- Technical analysis is very important in our opinion. All traders should have a firm understanding of the basic concepts of this field. Try to understand how to 2-3 technical indicators work. Doing so will greatly improve your trading skills.
- Study and understand the markets you are going to trade in. We have put up an extensive list of resources, all of which are free here. Free Trading Resources
- The law of balancing comes into play here. When you win a significant amount of money, help one person in your lifetime, and your rewards will be 100 fold.
- Options are a no-no. Under no circumstances, you should trade options until you have a firm grasp of the buying and selling stocks. Once you have locked in some profit, you can use some of this money to trade options if you still have the desire to do so.
- Learn to relax. A stressed mind is no good to you. A sick body is a body not at ease, so if you are not at ease, you will perform miserably in the markets.
So what’s next?
A true contrarian never opens a position unless blood is freely flowing on the streets or the investment in question is despised or being ignored by the masses. Buy when the crowd is paralysed with terror and panic and sell when the masses are jubilantly buying. When you are feeling ecstatic, flee for the exits.
Don’t be too confident as this is usually arrogance disguising itself as confidence. The stock market takes no prisoners Stops are an important part of trading; they help you minimise your losses. Never open a position without determining upfront how much you are prepared to lose.
Investing is all about emotions and overcoming them. Do not align yourself with the crowd for they are notorious for being on the wrong side of the equation.
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