This is an art form and a way of trading at market extremes. By definition, trading contrary opinion is a way of trying to catch market turning points.

Recently, when the Bank of England intervened in the bond market, there was a huge run of speculation as to how dire the outlook was for the GBP. However, we have seen a relief rally in the GBP soon after the most bearish events. Why? And how does that work?

There have been good reasons for the GBP weakness. A strong USD, the Russian/Ukraine crisis, worries over the inflation-boosting mini-budget, Brexit, and disorderly bond market moves. However, there reached a point early last week when it was nearly impossible to find anything positive anywhere on the GBP. The sentiment was maximally pessimistic. That’s the point where it often pays to have a contrary opinion. Buy why is this?

Think of it like this. How do you get nuts out of a tree – you use a tree shaker machine. It shakes the tree and all the nuts fall down. Leave the tree shaker on and all the nuts are off the tree. So, to extend the analogy, we know all the nuts are out of the tree when the fear is enough to ‘shake the out’. So, the question to ask is this, ‘are all the nuts out of the tree?’. Is anyone left to sell? If the answer is ‘no’ then that’s when it often pays to be a contrary trader. When no one is left to sell then it means sellers are exhausted and it is time to take profit. Take the other side of the trade. So, always ask yourself,’ are all the nuts shaken out of the tree’ in times of extreme sentiment.

GBPUSD


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High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure. *Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.

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