Sunday, September 2, 2007

The Art of Contrary Thinking - You Need to know it to Trade Successfully!

The art of contrary thinking is one of the most powerful tools a trader can use, and is a trait with which all true great traders are familiar.

What is the Art of Contrary Thinking?

The art of contrary thinking consists in training your mind to ruminate in directions opposite to general public opinions; but basing your opinion in the light of current events and human behaviour.

Humphrey Neills book, "the art of contrary thinking, the best known work on the subject, is based on the simple yet powerful idea that:

"When everybody thinks alike, everybody is likely to be wrong"

Why Contrary Trading Works

By spotting situations when the consensus is either extremely bullish or bearish, then a trend change is imminent, as it is likely the emotions of greed and fear have pushed prices too far away from true value.

This is evident in such events as the 1987 stock market crash.

Here we have a short-term, self-fulfilling prophecy. When the change occurred, everyone changed his or her mind at once, causing a huge move.

Of course, if you can step aside from the crowd and take a contrary view at these turning points you can make big profits.

Why Contrary Thinking will always be Valid

While Humphrey Neil's work, "the art of contrary thinking, (published in 1954), is the most famous book on the subject, there existed a century earlier a book on contrary thinking.

Charles MacKays book, "Extraordinary Popular Delusions and the Madness of Crowds, (published in 1854), covered three important financial crashes:

he tulip mania, the Mississippi madness, and the south sea bubble. He reflected upon how investors always pushed prices too far when caught in a consensus:

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

It is clear that to succeed in trading you need to think independently of the majority at important market turning points.

Becoming a Contrary Trader

Gann was one of the greatest traders and traded in the early 20th century. He realized that human nature would always mean that you had to think independently of the crowd to succeed.

We cannot escape it (emotion). In the future, it will cause another panic in stocks. When it comes, both traders and investors will sell stocks, as usual, after it is too late, or in the latter stages of a bear market.

He was aware that human nature was constant and influenced the majority of traders:

Therefore, in order to make a success, the trader must act in a way to overcome the weak points that have caused the ruin of others

How to Predict a Major Change

Gann was not just a writer; he was a successful trader and had an extraordinary record of accomplishment in the stock market, for example:

Gann used to publish a forecast for the following year. In 1928 he published a forecast which predicted the date of the September 1929 US Stock Market High, and that a Black Friday would occur, a year in advance of the actual events.

In 1932, he also recommended buying stocks at the all time low in the Dow in June and July.

Gann was one of the most successful stock market investors ever, and developed a strategy to set him apart form the crowd, and simply let market action indicate where prices were going.

To learn more about using Gann methods to improve your trading performance please visit our web site: