Contrary
Article covering Contrary Thinking.
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Article covering Contrary Thinking.
Last updated
Was this helpful?
In this endless voyage for control, we approach markets with expectations of making money, regaining lost funds, or simply seeking excitement in our otherwise normal and boring lives. It doesn't matter. We all face the same challenges and, for ~90% of us, make the same mistakes, in sync like a big flock of birds.
We are taught from a young age to follow, listen instead of speak, and adhere to an existing set of rules, or else! This way, we are hardwired to align our expectations with someone else or some figure who seems to have everything on track, the way we would like to have it on track, instead of following our intuition.
To think for yourself, make your own decisions, and have complete freedom, you encounter the next hurdle of your indoctrinated herd mentality, as you always seek confirmation from others. In markets, the one who dares to go against the herd wins big, but only during moments when the majority is in sync. During moments of indecision, you still end up losing money. Isn't that extremely hard? Yes, it is.
To teach yourself to be a contrary thinker, not only in financial markets but in life as a whole, you have to recognize patterns where the herd mentality gets triggered. A great example of this is through news, social media, and macro events as they unfold. How does the majority react? In this day and age, with the vast amount of accessible information, it is relatively simple to recognize patterns. Just look at some of the "biggest" news companies; it's likely they all have the same bias. You can apply the same principle to financial markets. If everyone (the majority) is expecting a certain move, it only takes one big contrary thinker (or entity) to provoke a certain reaction from the majority, as they were all expecting the same outcome.
Liquidation cascades in markets occur when the majority is positioned with high conviction, and the exact opposite happens.
To help you make contrary decisions based on data, envision what the majority is trying to achieve within your dataset. Have there been similar scenarios? Ask yourself many questions and use the data to build your contrary bias. In a market where the majority loses its money to a small percentage, it is safe to assume that the contrary thinker has a significant edge over the herd.
While contrary thinking can be very profitable when combined with proper risk management and reliable data to confirm that you are doing the complete opposite, there are serious risks when the majority acts out of order. For example, with GME, Melvin Capital was the contrary thinker, shorting it heavily and doubling down on doing the exact opposite of the majority. This resulted in a loss of $6.8 billion (over 53% of their total AUM) in a very short amount of time. Even with contrary thinking, being overconfident can be fatal, and sometimes you simply have to take your loss and look for the next opportunity.
Keith Gill (Roaring Kitty) was actually a contrary thinker taking on a massive hedge fund. Yet, the power of the internet and social media turned the world upside down.
Let me give you an example to help you get going:
Bitcoin is trading sideways with very little volatility during the weekend. Solana pumps +14% over a few hours, and on X (Twitter), people are showing their massive unrealized profits and calling for higher prices. As a contrary thinker, I envision it like this: BTC is not showing any signs of strength, and during the weekends, the volume is usually lower due to traditional markets being closed. Someone (an entity) fat-fingered Solana and triggered a response from the majority who were waiting for something to jump onto, and the price soared. As usual, less knowledgeable market participants are late to the party, and even though Solana is still up +12% (high at +14%), it is starting to slow down. Historically, Solana rarely deviates from being heavily correlated with Bitcoin, and if it does, it usually reverts back the same day. Due to the nature of PinoAPI, I do not have to time the exact top for optimal R/R. Instead, I can just build a decent risk setup shorting Solana, even if it goes a little higher. We do not mind, as we have our predetermined Trade Zone. After a few hours, Solana went higher, now showing a significant wick to the upside with a high for the day of +20% from the daily open. My setup has gained some size, but we are still very comfortable inside our Trade Zone. While observing the price action, I like to envision the wick being a reaction from early longs with size closing. I'd like to think that those longs closing here were the main reason we got this pump in the first place. In a few hours, Solana dived back down towards its daily open, now being +4% on the daily. Profits were made, risk was managed, and we simply collected the money from the herd jumping on the pump like flies attracted to a fresh turd. As we near the daily open, which I believe is the price at which we are back in correlation with Bitcoin, I finish my setup and call it a day.
Moves like the example scenario above happen on a daily basis, meaning there are plenty of opportunities to collect decent alpha (contrary thinking). All you have to do is scale the amount you risk each time you expose yourself to a potential opportunity and avoid being greedy when your envisioned plan plays out (even if it's just 40-50% of what you envisioned). Take the profit, get out, and find a new opportunity. Take your time.
When what you envisioned is not playing out within the predetermined timeframe, you can always take a small loss and observe from the sidelines again. As long as you are comfortable with your bias of doing the opposite of the majority, this approach can be effective.
