The Contrarians do not exist anywhere on that line. Instead, they sit outside the line and act when the two points occur where you see the text in the 2 grey boxes: one at the top of the graphic and the one at the bottom of the graphic.
You can see that greed and fear truly rule the markets and if you can figure out the correct entry points like I have you can make yourself a lot of money leveraging the masses, who are almost always wrong.
Ever hear statistics being thrown around? There have been a lot of numbers floated out there, but a majority of the people playing the market lose. Imagine this. You have 16,000 in your online trading account. You wake up one morning and flip on CNBC and see that the markets are crashing. Hard. You think of your money. What you really need it for. What you could be using it for. And now its burning up like a pile of cash vs a flame thrower. You didn't get in the market just to lose your money! You think of your bills. The car you could purchase with a good down payment. Hell, you'd rather use it to go to the Islands for a week than just lose it in a market correction.
So you run over to your computer and turn it on. It boots up and you check the financial websites. Commentators are having special reports and you look at your stocks. They are all in the red. You quickly do the math and see you have 12,657 dollars left. Money that could be used to start that house addition. Or send the kids to State. You just can't lose this money. You got in to make money, not lose it. A few clicks of your mouse, all your positions get sold and you are all cash. You are now safe even though you lost some money. At least you wont continue to lose. Then you start to think how you are going to allocate your money to your bills and other things.
The next day the market drops further and this reaffirms your decision to get out, you feel good about it. Over the next 2 weeks, the market rallys and bounces back and continues its climb. You are out of the market.
What I do as a Contrarian Trader in this Same Story
I wake up and turn on CNBC and I notice that the market is crashing. I flip around and watch different news stories as commentators are covering this event. My mind starts working on how I can make money with this, I need to look at the charts and see how long this could go and if we appear to be near a bottom. I turn on my computer anticipating making more money as volatility is my lifeblood. If the markets just walked sideways all the time Id have to do something else.
With the computer booted, I see that my stocks are all down in the red. This might be a buying opportunity. The bigger the dip, the better the buying opportunity. Because I know that the stock market is not going to go down to zero and disappear. And I have my finances set so that I have different piles of cash on standby on the sidelines to jump in and buy more. I am never 100% in at anytime. Situations like this are opportunities, to buy when prices are super depressed and there is blood in the streets and people are swearing off the market. Thats when it is time to buy. I wait.
The next day I check the charts again and see its another huge down day. I don't see any bottom signals yet with my candlestick analysis (among other indicators I use) so I wait. The third day I finally see it, a candle formation that tells me its the bottom and there is now buying pressure building up. I check the other technicals and they also agree. I then check the market sentiment via the Vix indicator and look at other fundamental news items: Jobs reports, anything else that might be coming out, and then I check the global markets. Once satisfied, I jump on with a few more piles of cash that was sitting to the side and get in a low prices.
A week and a half later, the market rebounds nicely, and I just make 30% on my holdings in a week and a half.
And that's the difference between a Contrarian Trader and most of the trading public.
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