There is a common saying that 90% of the people are generally wrong about the market.
So if most of them are wrong about the market, how do you think and be on the winning side? (Read this till the end, if you want to understand)
This post will cover a basic theory about the theory of contrary opinion, and how to use supply/demand theory to map prices and analyse market sentiments.
Give it a read till the end, if you seem to be interested!
You must have come across these topics:
- 90% of the traders fail eventually
- Or the 90:90:90 rule(mostly forex gurus will tell) -> 90% of the traders lose 90% of the money in 90 days
- Or you get too emotional by those "Trading gurus pretending to be making million dollar income" seminars? ***
- Or you are just confused how to think in this market?
***Many of them actually make more money by hosting seminars rather than by trading π
But hey, I'm not implying that they have less knowledge.
Having just knowledge alone wont guarantee you a successful trading career. You need to have Patience, you need to keep emotions in check, and you need to think a little bit differently. And most importantly, you need to have experience, and come up with your own trading edge. (No one will share their 'edge' with you most probably, but they can guide you if they know you.)
Before going into the details of the theory of contrary opinion or any other stuff:
Think about a simple, interesting (and fictional) scenario:
Imagine you think of a world containing people who trade only Bitcoin and there are no other assets.
Now lets imagine there are a total of 100 people in this market who are trading Bitcoin and there are no new entrants in the market. (Lets assume, price is $100)
Now lets say a few people (out of those 100) are bullish on Bitcoin. So they buy it. Lets assume, to fill their bids, they bid at $110 (assume) and they buy up Bitcoin. (Other people are clueless about the price and market)
Now on seeing them, lets say almost everyone gets interested on seeing the price rise.
Due to some trigger, due to some news, lets say everyone gets triggered to buy Bitcoin.
Who will they buy from? -> Those "Early buyers" They need to sell to the other people who are willing to buy. On seeing interest in the market, they increase the markup price, to lets say $200. So no sellers are in the market below the $200 price.
So anyway, they get triggered by some news that Bitcoin prices will reach $300, and they get in to the train. Lets assume, because of the news, most of the people (out of those 100, who didnt buy initially) actually buy Bitcoin. Now they need to sell (or exchange Bitcoin for other stuff) in order to make profits.
But:
- Those who sold around $200 dont want to buy around $300
- There are no new buyers in the market.
- The above two points imply that demand is not there around $300.
Result: most of the people gets trapped at that price, and there comes panic sell because of liquidity crunch.
Similarly, price went up when there were no new sellers (think about the markup, before the rally)
**This is not how "exactly a market works", its a bit more complex than this, but its not difficult to understand either if you are interested to know.
I gave this example just to make you understand a little bit.
Now relate that to the Bitcoin charts in more details and lets see the sentiments.
Think of the $20k peak and the $3k bottom in 2017.
Now lets look more closely:
I've tried not to make this clumsy, but sorry guys, it does look clumsy :P
Here's the link: https://www.tradingview.com/x/GozjkrCx/
Here's the famous "Wall Street Cheat sheet for you to relate"
Now, try to relate them with the sentiments, and the fictional theory I posted above.
- when the whole of CT(Crypto Twitter, or in generally, everyone) is bullish, if the news sources are calling for moon, if most of the traders are bullish, price usually goes the other way.
- Similarly, when everyone is bearish, price goes up.
Why? Read on!
Now, lets "Think contrary to the market."
As the name implies, it is a strategy that involves going against the (majority) investor sentiments, by doing the opposite of what everyone is doing.
Again: One more thing I want to point out strongly here: Thinking contrary doesnt mean you go "against" the market trends. That's where trading accounts blow up, that's where people get #REKT.
Feel free to check out my previous post about some of the common mistakes traders make in this market, if you wish to gain more insight. (Here's the link: @beehivetrader/top-mistakes-by-cryptocurrency-traders)
"The art of contrary thinking consists in
training your mind to ruminate in directions opposite to general public opinions;
but weigh your conclusions in the light of
current events and current manifestations
of human behavior."Taken from the book: THE ART OF Contrary Thinking
By HUMPHREY B. NEILL
Now think from a simple, yet powerful (and probably the most powerful) "Supply/Demand perspective" to understand why its happening:
Like how can market be bearish if everyone is bullish?
If people are bullish it means, they must have bought that asset they are bullish on.
So as more and more people go bullish (which is actually healthy for an uptrend), the price will go up, and the price will rise, and more people will get in.
price rises when demand is more, and supply is getting eaten by the market participants
Now imagine that "fictional theory I posted above"
(Assuming only a bullish market here)
What happens when there are no new buyers after the price rally? (Remember"that most people are still bullish" as everyone is calling for the moon)
Of course, demand decreases.
If demand decreases, price will go down eventually as it wont be able to find support; as everyone who already got wont spare more capital to buy more.
Think similar for a bearish market: There will be no new sellers, and as some people get interested, they will buy at higher marked up prices.
I'll cover more on this, as market sentiments are very confusing, and its not easy to cover in one article :D
If you are an expert trader, maybe this article can be like some "high school" stuff :P
or if you are a newbie, you may not understand all of it.
Of course, dont feel bad, if you get confused, perhaps, it can take a few days to really understand whats happening, and how to analyse the sentiments. (for me, personally, I felt like an alien when I read a few books about market psychology)
But again, its not some rocket science also. With simple analysis, you will be able to understand whats really happening, if you have a very basic understanding of supply and demand, and try to think of it in terms of supply/demand, and sentiments.
Takeaways from the Supply/Demand perspective:
- Supply gets reduced (more buying) means demand is increasing, -> Price= up
- Supply gets increased (more selling) means demand is reducing -> Price = down
- Demand gets increased (New entrants in the market) -> Price = UP
- Demand gets reduced (Market participants exiting) -> Price down
Takeaways from the Contrarian theory perspective:
- If everyone is bullish, and if price action is stalling in an uptrend, it means no new buyers are in the market -> Price will go down (sell)
- If everyone is bearish and if price is stalling in a downtrend, it means, no new sellers, -> Price will go up, if there exists interested market participants (buy)
- If everyone is calling for moon, maybe that will not happen. (sell)
- If everyone is calling for doom, maybe that will also not happen. (buy)
Contrary opinion often involves targeting and investing in /assets which are almost "dead" or "distressed" and is also based on the psychology behind the common people, who fail in the markets.
One point here: you will see people get interested only once the asset starts going up. and they lose interest once it starts going down; which perfectly aligns with the theories. Herd behavior exhibited by most of the people in the market doesnt make for a good "investment" or "trading" strategies.
There are thousands of tried and tested theories. I'll be covering Mass Market psychology,
Crowd psychology, and all stuff slowly, and maybe make my profile a simple information hub for new traders in this market. This is only 10% of the tip of the iceberg that I wrote today :)
If you look at the chart, you can relate why theory of contrary opinion works. If you didn't understand, let me know in comments!
I'll take all the critical points to come up with a better and more informative article later on!
While I have covered the theory for Bitcoin markets, take a look at another article (I found on the internet) about the same, in stock markets.
http://www.timothylutts.com/the-theory-of-contrary-opinion/ (I'm not affiliated with this blog. shared it for informational purposes)
Also, I think after reading this whole point, you can relate to the famous saying by Warren Buffet: "Buy when everyone is fearful, Sell when everyone is greedy" :)
That is the most prominent example of a contrarian investor I could find.
P.S. This may not work in your regular "intraday, leverage, scalping and all", because of the noise associated in the markets, but it works superb in long term trades...