Being a contrarian investor is potentially very profitable yet way more risky than trading with a trend. It is a lot easier to take advantage of a herd mentality and go with the crowd. But I would not choose a popular strategy to do so and always rather invest the time and effort into creating my own trading strategy. Your profitability might depend on it! Here is why.
On a very fundamental level, you are rewarded in a stock market (and forex market) for doing things differently than most people. Even when you trade along with the trend, you want to jump in during local dips and get out before everyone else decides to do so and the price plummets again. Yet those local lows are created in moments when not many people are buying and peaks happen the very same moment most think it is a great idea to start a new long position.
This makes financial markets very counterintuitive and paradoxical. One could say that the majority is never right in the stock market. It never can. As a popular pattern emerges, more and more people are trying to exploit it and they are moving the price against them. Eventually, the advantage of knowing this pattern disappears completely.
I understand some people’s desire to use only a proven and already successful strategy very well. Markets are already risky, why would you risk even more using your own experimental approach? Because you want to have a unique know-how. The less people are using the same entry points as you, the better price and more time to hesitate you are left with.
Similar thing applies for exit strategy. You should want your sell signal to be as unique as possible, so not everybody starts hitting the Sell button when you are. Otherwise, it becomes a race who hits that button sooner and the whole profit keeps shrinking.
Creating your own trading strategy is surprisingly simple. You don’t have to come up with something completely paradigm-shifting. Actually, I would try to stay away from too novel approach. Those ideas are rarely good and often too contrarian to work. Just research some popular patterns and indicators and put your own spin on them.
It might be that you will be using a different time frame like 10 minute candlesticks instead of 5 minute candlesticks. Or you will focus on a less popular index than S&P 500 and using a strategy originally developed for S&P 500. Or maybe you combine two previously separate strategies to make the final decision.
The beauty of this also lies in the ability to tailor your own plan to what resonates with you and you are good at. But whatever you come up with, do not fall immediately in love with. Test your own trading strategy extensively. Paper trading is nice but I also recommend a trial run in the live market with small test amount of money. Only that way, you can be sure if you created something profitable or if it needs more tweaking.
One more thing is very important to know. When I am talking about a trading strategy, there is more to it than just picking buy signals. In fact, when you enter the position is probably the least important part of it. Money management and especially the exit strategy matter way more.
So put even more time and brains into figuring out the right level of stop-loss orders (which doesn’t have to be rigid but rather a percentage of a potential gain) and your exact profit taking strategy. Once you hit a certain amount of profit, will you get out immediately or set up a trailing stop-loss? Small changes in similar matters can make the whole difference between failing and succeeding.
I like to incorporate also some rules that go beyond simple analysis and money management. For example, I am not trading on days that I am in a bad mood and I don’t enter new positions on Friday because so much can change in a sentiment during a weekend. But that is just my experience and you can come up with your own “deal-breakers.”
Conversely, I have a couple signs that allow me to override parts of my own trading system and jump in although only some of my usual requirements are met. I believe that certain flexibility within the confines I developed is giving me an edge against the herd that keeps trading completely mechanically.
Still, do not give yourself too much leeway to override your own rules, otherwise you will end up being swayed by your emotions. The right plan is a delicate balance between many factors. Fine tuning will most likely need to happen once you test the waters of the real market and that is OK.
And one fine bonus of coming up with a trading strategy you yourself created: the pride when you actually start being profitable is way bigger than if you just copied blindly someone else’s approach.