9 rules for contrarian investing

December 3, 2015 10:59 AM

When it comes to investing, the first rule you need to learn is effective management of your emotions. It is impossible to eliminate the impulse to act when euphoria or panic are in the air. While you cannot eliminate the emotion that pushes to you react, you can control your reaction. You can choose to run with the herd of fight panic or stand aside while the herd stampedes. The most important rule is to never let your emotions do the talking. This means not succumbing to panic or euphoria. If you fail here, then nothing can help you. All the rules in the world will fail to alter your outcome.

1. Manage your emotions: Panic and euphoria are useless when it comes to trading. Control them or be controlled by them.

2. Value patience and discipline: These are two of the most important traits that you need to master, after the above rule. You cannot win in the markets if you are in a rush and lack discipline. You need to wait for the crowd to panic, before deploying large chunks of your money into stocks. If you decide to short the markets, do not oppose the masses just because they have jumped on the bandwagon. You 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.

3. Avoid all forms of popular media: In other words, if you are going to these places for investment advice you are probably not going to fare well in the long run. Use popular media to get a gauge on what the masses are doing. 

4. Come up with a strategy before you start playing with real money: Don’t attempt to score 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.

5. Technical analysis is important: All traders should have a firm understanding of the basic concepts of this field. Try to understand how to two to three technical indicators work. Doing so will greatly improve your odds of succeeding.

6. Study and understand the markets in which you are going to trade: We have put up an extensive list of resources, all of which are free on the Tactical Investor website.

7. The law of balancing comes into play: When you win a significant amount of money, help one person in your life and your rewards will be 100 fold.

8. Options are a no-no: Under no circumstances, you should not trade options until you have a firm grasp of 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.

9. Learn to relax: A stressed mind is no good to you. A diseased body is a body not at ease, so if you are not at ease, you will perform miserably in the markets.

Final words

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 paralyzed 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 because they help you minimize 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. 

About the Author

Sol Palha, with Tactical Investor, is a self-taught student of the markets and provides compelling insights into the markets by combing the key elements of mass psychology with the supreme elements of technical analysis. He has been studying the markets for over 18 years.