Giles Coghlan LLB, Lth, MA
HYCM
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.
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