The statistics surrounding retail traders performance in Forex trading reveal a frightening percentage. Almost ninety percent of all retail traders lose their first deposit.

Multiple reasons contribute to this terrible statistic. Factors which are human nature like fear and greed play tricks on all of us.

Aspiring Forex traders fear losing the account the moment a position goes against the desired direction. As such, they engage in all kinds of wrong-doings like removing the stop loss, adding more funds to increase the margin level, and so on.

In the end, the margin call still comes as chances are slim to make a buck without proper education in the area. The sooner traders understand this, the better.

The crucial point is that retail traders don’t know who they are facing in the trading arena. The volume found in forex trading doesn't come from the local trader, moms and pops sitting on a couch and speculating on the value of one country’s currency.

Instead, Forex trading’s volume comes from institutional players like central and commercial banks, big investment houses or high-frequency trading companies. Only about six percent of the trading-related volume belongs to retail traders.

As such, retail traders don’t move the prices on the currency market. At best, what they can do is to identify the easiest way to align their interests with the big player’s interests.

Fighting Statistics

Based on the above, the retail trader’s journey starts with low odds to make it in Forex trading. Statistics, as you have realized by now, won’t help.

It means that there must be something wrong with the general approach to Forex trading. If almost everyone that comes to the market loses their first deposit, the task is to identify what is the common approach. And then, to do the opposite.

The funny thing is that financial markets don’t require much of a decision. It is a dual-process, of choosing between two options: up or down.

Hence, in Forex trading, all one needs to do is to decide if a currency pair goes up or down too. The decision to buy or sell follows.

Introducing Contrarian Trading

Contrarian trading as a concept is a daring one. It defies logic and conventional wisdom and sends the trader on a unique trading journey.

Needless to say, it is a riskier approach to Forex trading than normal. However, if everyone struggles with making money in the Forex market, how can anyone say contrarian trading is riskier?

A contrarian approach gives the trader a competitive advantage ahead of other market participants.

First, it is a different way to look at the market. Different, in this case, could be good, as statistics tell us.

Secondly, it offers fantastic risk-reward ratios. If the regular norm in the industry is to target two or three times the risk, a contrarian approach gives the opportunity to find much bigger risk-reward ratios.

One of the reasons for that comes from the contrarian nature that implies almost always picking up a top or bottom. That is, for short-term oriented traders that use technical analysis to buy or sell a currency pair.

Technical Contrarian Trading

Japanese candlesticks techniques are the perfect example to illustrate a contrarian trading strategy. Because most of them take so little time to form (even one candlestick is enough for patterns like a hammer, shooting star, or Doji), to pull the trigger on a trade requires contrarian thinking.

In earnest, the trader buys or sells at the bottom or at the top. Hence, it is no wonder that Japanese candlesticks techniques give much better risk-reward ratios for a trade when compared with the classic pattern recognition approach. Think of a head and shoulders pattern, look at the time needed for it to break, and then compare with the time necessary for a Japanese candlestick pattern to form, and you’ll see the difference.

This leads us to another technical aspect of contrarian trading. Because most retail traders use technical indicators to buy or sell a currency pair, it means that something is wrong with their standard interpretation.

Otherwise, the generated signals would be so powerful that everyone would make a profit. Which, again, statistics tell us is not the case.

To overcome this issue for instance, contrarian traders might ignore the standard interpretation of oscillators. Instead of buying in oversold and selling in overbought territory, they focus on finding a way or strategy to do the opposite.

Fundamental Contrarian Trading

Contrarian trading is not only technical but fundamental too. This one addresses traders that keep positions open for a more extended period, from weeks to months or even years. Or, to swing traders and investors, traders that have a different time horizon in mind for their trades.

A contrarian fundamental approach is the result of research or deep macroeconomic understanding. Typically, traders involved in this kind of trading have no problem going against the general wisdom.

For instance, selling the U.S. Dollar after a stellar NFP (Non-Farm Payrolls) approach may look like a suicide attempt in the eyes of most retail traders. However, the savvy swing trader or investor looks at it as an opportunity and a great entry place for a contrarian trade based on macroeconomic differences between the two economies that the currency pair represents.

Contrarian Psychology

Perhaps the most critical aspect of contrarian trading comes from the psychological part. All types of contrarian trading explained so far will fail if the psychology of the trader fails.

A contrarian approach, in this case, requires intense discipline and in-depth knowledge about what you can do in Forex trading. If your instinct tells you to sell, fight it. If you want to close a position just because you are greedy or fear for a loss, fight it too.

When you have no patience anymore as the market doesn’t go anywhere, think of it as part of the trading game. Don’t react, just stay disciplined.

It may sound like a cliché, but discipline is a contrarian approach to trading. How come?

Because most retail traders that lose in the market don’t have a disciplined approach to trading, not surprisingly, the one that has it stands more chances to win.

Conclusion

Contrarian trading is a sensitive subject in Forex trading. For uneducated retail traders, it seems like a risky approach to trading.

However, that’s a shallow analysis as traders fail to realize that a contrarian approach is precisely the piece that is missing from making a constant profit in the market.

There is a saying in trading that you should not follow the crowd, as the crowd is usually wrong. But the problem, of course, is that everyone thinks of themselves as not being part of the crowd. Hence, the trading approach slips back to square one.

Try to be original both in thinking and in interpreting events and market levels, and you’ll understand that the standard positioning is contrarian to what market does. As such, the line between contrarian trading and normal positioning is so thin, one wonders where the true trade lies.

Obviously, money management plays a critical role in contrarian trading. If anything, it is the pillar of it. And discipline, it always comes back to discipline.