I answered a question on LinkedIn the other day and I thought it might make sense to get a discussion going here or on Facebook.
Question:
Are contrarians and trend followers fundamentally different in how they view the market or do you think that a contrarian trader is simply a momentum trader thinking in terms of the 1st derivative of the market price time series?
My Answer:
Another way to look at the behavior of contrarian investors/traders is that they emphasize/discount a specific hueristic that the “crowd” is not and therefore seem that they are contrarian or going the other way.
For example, say the crowd is ultimately bullish on gold. One thing that a contrarian might focus on is the ability for a central bank to sell gold at today’s prices and act accordingly. The bulls know that central bank selling is possible, but the contrarian might have more focused or special insight on this potential phenomena…even if it’s only a gut feel.
It’s important to note that it’s not until AFTER the central bank sells that the msm will report that gold bulls/bugs got killed and contrarians made out well.
In my experience, contrarians are just men and women who can think for themselves and don’t necessarily think of themselves as contrarians, just unique in their thought processes.