Contrarian Long Trading

Tuesday, June 06, 2006

Contrarian Long Trading

Another way to make a killing in the market is to do the opposite of what the panicking herd is doing. When they all panic and sell sell sell it might be time to buy buy buy. For this to work you have to do your fundamental research. You have to KNOW that this is a good company and a good stock, and that the panic sell off isn’t on bad news. Usually you should wait three to four days after you find a stock that seems good but has been plummeting like Superman in a Kryptonite hailstorm, then buy. Usually on the last day it drops big you’ll see a volume spike. To me, that volume spike is a buy in two days signal. This gets you in at, or near, rock bottom, and as soon as the panic wears off, your new buy will take off.

This is a long play, you can’t usually call it accurately enough for a day trade. In somewhere in the range of weeks or months most of these stocks will return to their real market value (middle of the chart between highs and where you bought it). This has actually been one of my money makers over the years, It’s fairly predictable, and usually works if they meet all of my criteria, but do it with a stop loss on, because one in a hundred times the herd is right, or it’s an insider sell off and the $#!% is about to hit the fan.

The whole contrarian idea is that most traders are idiot momentum (mo) players, and that’s part way true most of the time. The guys who made the most in the stock market this century are guys who bought after the big crashes when everybody else was scared out of the market. Buy low and sell high, that’s the formula for success.

You can’t beat doing your homework. You really should know and like the earnings for the last eight quarters before you buy any stock. That’s hard for the number of stocks you’ll have to know about to day trade, but easy for this kind of play. This is one of the few times I might put all my eggs in one basket, and not stay diversified, but to do that you have to be ABSOLUTELY SURE that your research is right and that there is nothing funny going on you don’t know about like a big lawsuit or the bankruptcies that usually follow the big lawsuits.

I remember reading somewhere, a guy who said he was a contrarian to the core saying sell everything you own when the guys on the TV say the market is at its best, and mortgage the farm to buy everything you can when they are crying about a crash. It’s not always true, but it is something to think about. Personally, I wouldn’t advise trading on credit. I don’t even use margin. That might be why I’m still in the game, because there are a couple of times I would probably have been wiped if I’d had margin calls to deal with.

Anyway, back to the point, this is the kind of stock I look for when I don’t have time for Day Trading, or when my luck has been bad and I am irritated with the Day Trading Strategy. I’m not saying that Day Trading doesn’t work, just that if you are burning out take a break and put you money in something you believe in while you get you confidence back. Day Trading takes a positive attitude and a love of what you are doing and everybody has bad runs where they either make bad decisions, or things just don’t go right. Happy trading.

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