When we look at some of the most popular sayings in the financial markets, one is the suggestion that it is generally wise to buy low, and sell high. In many contexts, this can be quite difficult because the saying assumes that traders will be able to identify exact turning points in major trends in order to spot maximum value. In some cases, this might be true. But it is always a good idea to understand the idea of contrarian trading strategies and ride the trade to profit.
Harmonic Forex Trading
One of the most advanced techniques for those looking to implement contrarian trading strategies is the harmonic pattern trading. This approach is able to pinpoint strong price reversals in very small trading zones. These patterns unfold in M-shapes in bullish scenarios and as W-shapes in bearish scenarios. The main characteristic of these shapes is the fact that they come in at the end of extreme price moves. This creates incredible opportunities for traders that look to buy low and sell high.
Additionally, harmonic patterns allow for extremely small reversal areas a.k.a Potential Reversal Zones (or PRZs). This gives traders the ability to limit risk substantially by placing stop losses just outside the small reversal zones. Harmonic positions require an online trading account from a broker that offers advanced charting platforms.
A more commonly used technique if the Fibonacci Retracement. It is excellent for identifying smaller reversal points within a larger trend framework. These types of trades need more active management and supervision. However, given the fact that the broader trend is still operating in the opposite direction.
Common retracement levels are the 38.2%, the 50%, the 61.8%, and the 78.6% Fibonacci levels. This is a relatively basic approach that is well-suited for Forex newbies who use contrarian trading strategies. Also, it needs clear levels of reversal in order to place shorter term Forex positioning stances.
Elliott Wave Analysis
Elliott Wave analysis is another commonly heard but less commonly used technique for identifying trend exhaustion points. This technique views trends in terms of 5/3 wave structures. 5 waves mark the dominant trend and 3 waves mark the corrective trend. When using EW analysis to place active Forex trades, investors will generally look for situations where an entire trend has run its course. You can open trades in the opposite direction in this case.
Why Contrarian Trading Strategies?
In all, Forex traders can use these techniques to find value in extended markets. This is one of the best ways of maximizing profits and reducing losses. Each of these techniques should be considered using a Forex demo account so that you can master the approach before any real money is on the line.