How to trade against the crowd

It’s true that many forex traders only ever trade with the trend. They attempt to buy the market not at the bottom, nor sell at the top, but as the trend is already in motion and therefore to try and catch some of the middle.
This is a good strategy for some, but it can often have a lower winning ratio than other methods.

Many traders prefer a contrarian strategy, that is to go against the crowd and in effect to go against the trend. It can work equally well but often requires stronger conviction and a more robust money management system. Here are some things traders look for when trading against the crowd:

COT reports and open position data

One of the best ways to trade against the crowd is to look at the data itself. The Commitment of Traders (COT) report is provided weekly by the CFTC (the US Commodity Futures Trading Commission) and divulges how many contracts were bought and sold of a specific contract by commercial, non-commercial and private investors.

When there are way more non-commercial traders holding trades than the historical average, it’s a clear-cut sign that the crowd is positioned on just one side. And this can indicate excellent reversal opportunities.

Open position data from forex broker Oanda is also a good source for seeing how traders are positioned in the currency markets.

Magazine covers & sentiment surveys

Sentiment surveys, the kind provided by Barrons and Investors Intelligence, are simple enough to evaluate. They provide reliable survey data of whether traders are bullish or bearish on certain markets which can be used to evaluate the crowd. Simply, if the majority of traders are bullish, say over 70%, then it could be time to go against the herd.

Similarly, magazine covers have also been used as a contrarian indicator.
When a news story makes the front pages of a major magazine or newspaper, it signals that something big has happened, and this is usually a time to go against the crowd, since by the time the media pick up on a story much of the move will have taken place and all the information will be in the public realm.
For example, if TIME magazine decide to run a ‘shock’ story on the cover about the demise of the Japanese; it’s usually a signal to go long JPY.

Scan a chart

It is possible of course, to go against the crowd just by looking at a chart. Economic cycles typically take a while to play out but markets can over-react when too many traders move to one side of the trade.

Sometimes the chart will show a situation where the price is becoming parabolic; in other words it is heading down, or up, in a near vertical fashion. Clearly, such moves are unsustainable and these are some of the best opportunities to go against the crowd in the forex markets.