20 October 2022
Short-term traders often adopt a contrarian investment strategy to make money from mispricing. This global investment strategy can potentially work with any market, stocks, shares, or other types of investment and is based on market exuberance. However, there are many issues to consider with both global investment and contrarian investment to maximise your returns.
When looking at different markets, it can be tempting tooverlay a blueprint which works in one market onto another. This can be challenging as a global investment strategybecause there are different traits in different markets. When looking towards global investment, you need to consider issues such as:-
• Market efficiency
Once you begin digging a little deeper, you may also come across various additional issues to consider. For example, while it is all good and well to have a global investment strategy for your investments, you also need to appreciate the local market intricacies.
In many ways, the contrarian investment strategy fits perfectly with the mindset of short-term/day traders looking to make money from mispricing. While there may be differentcharacteristics for different domestic markets, the concept of contrarian investment can fit with a global investment strategy. In many ways, contrarian investment is based upon one issue, short-term exuberance.
While markets tend to "get it right" in the medium to long term, short-term exuberance on the upside and the downside will often play into the hands of contrarian investors. For example, a company may bring out some fantastic figures, higher-than-expected, and the share price reacts accordingly. As investors pile into the stock, this can create a situation where it is pushed too high, and there is the opportunity to go against the market and go short.
The same will occur on the downside when a company brings out disappointing news and investors run for the exit doors. The considerable weight of selling pressure, together with many buyers taking a step back, can lead to a significantly oversold position. As a global investment strategy, this can work in any market but you need to understand human nature.
When dealing in liquid stocks and other investments tools, the markets tend to "get it right" more often than not. If you take a step back, and this works on a global investment basis, consider the markets to be information exchanges. The different views and opinions of analysts/investors, via published research and actual investment, are absorbed by the market. This information is used to arrive at a “fair price” for the asset. However, human emotion is most prevalent in the short term, which shows itself as exuberance on the upside and the downside.
As a contrarian investor, there is the potential not only to trade stocks but trade on human emotion and knee jerk reactions. This can also be expanded to a global investment strategy, with markets marked up and down on short-term external factors. In this situation, a contrarian investor will look towards quality stocks with liquid markets which have either been overbought or oversold. It is easy for stocks to get dragged higher and lower by overall market movements, sometimes not reflective of their underlying situation or deemed “relative value”.
As a global investment strategy, taking a contrarian approach to short-term movements in markets and individual stocks can be lucrative. While there may be various local market issues to consider, the main concept remains constant; investors will always overbuy and oversell on good and bad news. Tapping into these situations and making the most of them is a skill many successful short-term traders have harnessed.Back to News