- 1997: Volume 6, No. 5 The Sometimes Contrarian

So you say you are a genuine, died-in-the-wool, card-carrying contrarian trader? Congratulations! You're the rarest of the rare, one of the natural wonders. The chances are, however, that you are really a "sometimes" contrarian, in which case, you have problems...

All of us, even traders, are guided by the unique patterns in our behavior-thoughts and emotions that we have developed over time. Our neuro-networking systems are like little soldiers, waiting to take orders and do whatever is expected. When we feel the same feelings over and over again or think and behave the same way in response to a specific experience, our neuro-networking systems begin to anticipate our reactions to this same experience. This anticipation creates the patterns by which we live. When these patterns are positive and supportive ones, they allow us to function smoothly and to do many things at once without reinventing our reactions to common situations.

Switching To Auto-Pilot

These automatic responses are deeply ingrained in our neurology, which is why, for example, it is so difficult for people who have driven for many years with standard breaks to adjust to the newer, anti-lock breaks. Driving responses become automatic and unconscious because they require us to respond to similar situations over and over again. Many of the important activities of our lives are controlled by these automatic responses with trading being one of the most important. For better or worse, these unconscious patterns have an enormous influence on your trading results.

Decision-making responses

Every trader eventually develops a set of patterns of logical and emotional automatic responses which become his or her unconscious decision-making system. Positive or negative, these patterns give structure and direction to a trader's work. If these patterns arise from poorly conceived ideas or negative and self-destructive feelings and thoughts, the decisions that result will quickly lead a trader in the direction of loss and failure. If these patterns arise from well-conceived ideas and positive, supportive feelings and thoughts, the decisions that result will lead a trader in the direction of success.

What happens, however, if these patterns are suddenly interrupted? Or worse yet, what happens if your pattern is a "sometimes" pattern? This means that your pattern is to do things one way most of the time and the opposite way sometimes, whenever a particular set of conditions takes place.

The Contrarian Trader

In the trading and investment world, there are two competing philosophical camps. The first camp subscribes to the notion that "the trend is your friend" and that, to make money, you must identify the trend and ride it in the direction that it is going. A trend-rider is an integral part of the crowd, sensing its direction and merging with it. There is a compelling logic to this philosophy because it works very well in the right context. Trend riders can do very well as they buy into a rapidly rising market if they can hang onto the ride upward without getting whipsawed and hurled onto the sidelines.

The second camp subscribes to the notion that, in order to make real money, you must do what is contrary to the crowd. Thus, to be a contrarian in the markets means that you identify the trend and go in the opposite direction, buying on widely perceived weakness and selling on widely-perceived strength. There is a compelling logic to this philosophy also because it, too, works very well in the right context. Contrarians can profit very nicely by catching the trend as it breaks in the opposite direction, leaving the crowd on the wrong side of the move.

The problem with being a contrarian is that maintaining the contrarian response is difficult for most people, even when they believe in the value of it and even when they consciously attempt to put it into effect. When a strong market is going up and the crowd is busily making money buying or when the market continues on a long, downward plunge and the crowd is "wisely" selling, common wisdom (do the opposite of the crowd) seems to defy common sense (sell while there is still time.) When emotion is running high and the pull is very strong in one direction, few traders find anything appealing in the contrarian viewpoint and even the most die-hard contrarian must fight hard internally to maintain his opposition.

The Sometimes Contrarian Trader

Although most people cannot follow the contrarian path comfortably, there are those traders who are contrarian by nature. They have always followed the beat of a different drummer, even among supposed contrarians. For example, Theo is a born natural contrarian. Like most children who are trying to show their independence, Theo said "no" to whatever suggestion or demand was being imposed on him. However, most children learn that going against the flow is too uncomfortable and generally give in to the pressure to follow everyone else. Not Theo. His contrarianism became the central response to any social or intellectual movement. In fact, his contrarianism was responsible for his successful career in trading and a generally successful life.

Theo's contrarian position served him well until there was a major shake up in his life. Theo's wife, Lettie, decided to leave him. Although Theo was a good provider and a generally good individual, his contrarian nature made it difficult for him to appreciate his wife's needs in their marriage. Despite the fact that Theo loved and needed his wife, whenever he sensed that she needed him to respond in a certain way, he felt pushed and coerced. His contrary nature forced him to respond exactly opposite to her needs, thereby leaving his wife to feel hurt and unloved. When Lettie divorced Theo, his values and direction underwent a major upheaval which forced him to do some soul searching and to change many of his ways. Although these changes made Theo a better person to live with, they also affected his contrarian thinking. As a result, his trading suffered.

What happened? Theo had conditioned his unconscious to a set of values and emotional and physical responses to market conditions that were highly contrary to the influence of other traders. His responses were so automatic that he no longer even formed thoughts about his judgments and their consequences. When Theo consciously decided to respond differently to the people around him, everything changed.

Imagine Theo's mind as a big computer center with storehouses of information which feeds back to him exactly the information that Theo gives it. Suppose that Theo had always given it information leading in a certain direction and suddenly presented it with information that led in a totally opposite direction. What do you think the new output would be like? Theo would probably get some very mixed messages. This is exactly what happened to him when Theo, who had always made contrary and independent trading decisions, started to let others influence his thinking.

Another example of a contrarian trader who interrupted his pattern was Ray. As a successful trader whose income was consistent from year to year, Ray could almost predict what his income would be like at the end of the year within a range of ,000. Unfortunately, when the company for which Ray worked was bought out by another, stronger company, many of the high standards and rules set by the previous management changed. Ray soon realized that he could no longer deal with his clients at the same high level of integrity and stay with the company. Ray had to make a decision whether to leave a lucrative client base and go someplace else and start from scratch or compromise his set of standards. Ray decided to stay.

Ray attempted to comply with the demands of the new owners. Their ideas about the way Ray would trade in the future was in total opposition to the way he normally traded. Naturally, this arrangement was doomed to fail. However, when Ray finally left and went to work for another firm, he was left with a conflicting decision-making strategy.

The story for Al was completely different from the previous traders. Al was a contrarian at heart whose pattern had long been one of periodic mixed messages. Raised in a strict home, Al's immediate response was to rebel against anything and everything that other people required him to do. By the time he started school, he had become a contrarian in nearly every area of his life. He was especially strong in making decisions that were needed to solve thorny and long-standing problems since he did not resort to tried and true solutions.

However, there was one area of Al's life in which he was vulnerable to outside influence. Whenever Al felt guilt or remorse, regardless of the circumstances, he resorted to a pattern of thinking that was accommodating to the human influences around him. Guilt made Al lose his self-confidence and his sense that he was morally and intellectually superior to others. Since Al was trading with other people's money, whenever he would experience a loss for which he felt personally responsible, his trading would suffer terribly until he was able to regain his sense of confidence or until he was able to come to terms with the loss. The results of Al's periodic vacillation were that he would trade very successful for many months, creating substantial profits and gains, only to give them all back and sometimes more, whenever he lost faith in himself.

Sometimes, contrarian traders are able to keep their independence alive only as long as they are not exposed to outside influences. In Jack's case, he could function as a contrarian trader very successfully until he joined a small group of traders. His contrarian decision-making was set upside down whenever he would hear his associates collectively urging on the market in one direction or another. And some contrarian traders are able to stay on track as long as they avoid specific influences that seem to have special associations for them. It could be a particular trader or analyst, or even a specific news source. Once exposed, these traders break with their patterns and lose all control over their trading.

The Fruitlessness of Inconsistency

If contrarian thinking is working for your trading, this pattern, once established, is an important cornerstone to your trading. All trading methods and systems, regardless of how successful they are will create periodic losses. But, if the system is producing consistent, dependable, winning results over the long-term, then periodic losses should not result in inconsistent methods.

The result of periodic vacillation between a contrarian approach to trading and any other vastly different approach is to send your unconscious mind a set of mixed messages. When your neurology becomes confused, it cannot perform well and results suffer. This statement applies to every human endeavor. For example, I saw an interview once of an old, respected child psychologist who was asked what the secret to raising emotionally healthy children was. She replied, "Consistency!" When pressed, she said that even if a mother were consistently sad, or grim, or critical, a child would learn how to respond appropriately. But, if one day, a mother is all smiles and the next day she's enraged over the same set of circumstances, a child will become neurotic and unable to make appropriate choices or decisions. The same principle holds with a trader who sends his own inner child a mixed message: "one day we go against the herd and the next day we join it."

Making the Decision to be an "Always" Contrarian Trader

It is not written in stone that you must be a contrarian trader to succeed. What is written is that, to succeed, you cannot be a sometimes contrarian trader. For that reason, you must decide who you are and what kind of a trader you should be. Here is a strategy for discovering your own decision-making strategy:

• Decide whether your decision-making strategy is bringing you the kind of results that you want in your trading?
• If it is, then decide what criteria do you use for making decisions. Is it based on going with the trend? Is it based on going in opposition to the trend? Or, is it a combination of both under specific circumstances?
• Once you are clear about your rules for going with or against the common trend, make yourself aware of anything or anyone that will influence you to go against your normal patterns. When you are aware of these influences, you can take steps to avoid anyone or anything such as, newsletters, particular people or company policy.

Conclusion

Consistency may be condemned as the hobgoblin of little minds, but if the consistent patterns that are established have produced long-term results, then hobgoblins it is! These patterns are broken at a trader's peril, just the way athletes suddenly lose their performance edge when they break successful patterns. This is especially true of traders who have established contrarian practices in their trading. Since the contrarian stance is a difficult one to maintain when all of the forces are pulling in the opposite direction, a contrarian trader must know who he is and why. Then he must learn to identify and avoid the traps in his environment which are ready to trip him up and set him on the path to confusion and lost results.