The world of stock trading is complex and ever-changing. It requires a strong understanding of market trends, economic indicators, and company financials. But even with all the data and knowledge at one’s disposal, some still choose to go against the grain – the contrarian traders. These individuals make decisions based on instinct and intuition rather than following the popular sentiment.
In Singapore, where stock trading is a prevalent form of investment, contrarian traders have achieved significant success despite going against conventional wisdom. But what drives these traders to take such bold and often risky positions? This article aims to provide insight into the psychology behind contrarian stock trading in Singapore and why it continues to be a prevalent strategy among investors.
The drive for control
Contrarian traders often possess a high level of confidence in their decision-making abilities. The opinions of others do not sway them, and firmly believe that they can outperform the market. The need for control is rooted in psychological theories such as locus of control, which refers to an individual’s belief about the extent to which they have control over their lives. Contrarian traders tend to have an internal locus of control, meaning they believe their actions and decisions directly impact their success. This mindset leads them to take responsibility for their investment outcomes, whether positive or negative.
Contrarian traders have a high level of self-efficacy, which is the belief in one’s ability to succeed in specific situations. They have a strong confidence in their knowledge and skills, allowing them to take bold positions in the market, even when it goes against popular sentiment. This drive for control is also reflected in their tendency to seek information and conduct thorough research before making investment decisions. By doing so, they gain a sense of mastery over their investments and increase their chances for success.
The need for autonomy
Contrarian traders often have a strong desire for independence and autonomy. They want to avoid following the crowd; instead, they prefer to make their own decisions based on their market analysis. This behaviour can be attributed to psychological theories such as self-determination theory, which states individuals have an innate need for autonomy, competence, and relatedness. Contrarian traders seek to fulfil their need for independence by going against the popular sentiment and making decisions solely based on their analysis.
Contrarian trading allows individuals to control their investments, as discussed earlier. By taking independent positions in the market, they are not swayed by the opinions or actions of others, which can often lead to herd mentality and cause market fluctuations. This need for autonomy also ties in with their self-efficacy, as they believe they can make successful investment decisions without relying on outside influences.
The role of market cycles
Contrarian trading is heavily influenced by market cycles, which refer to the pattern of economic booms and busts. Contrarian traders tend to go against popular sentiment during both bullish and bearish markets.
During a bull market, when stock prices rise, contrarian traders may take short positions or sell their stocks, going against the popular belief that prices will continue to climb. This behaviour is rooted in the belief that stock prices are overvalued and due for a correction.
On the other hand, during a bear market, when stock prices are falling, contrarian traders may take long positions or buy stocks at lower prices, anticipating an upcoming rebound. They understand that market cycles are temporary, and they can profit from market corrections by going against the popular sentiment.
The allure of risk-taking
Contrarian traders are often seen as risk-takers, and their willingness to go against popular sentiment is a prime example of this behaviour. But what drives them to take such bold risks? According to psychological theories, individuals have varying levels of risk aversion, which can be influenced by factors such as past experiences, personality traits, and emotions.
Contrarian traders tend to have a higher tolerance for risk, as they can stay calm and logical during market volatility. This behaviour can be attributed to their high levels of self-efficacy and control, discussed earlier. They have confidence in their abilities to navigate the market even during uncertain times, reducing their fear of potential losses.
Contrarian traders may also experience a phenomenon known as ‘loss aversion’. It refers to the tendency for individuals to feel stronger emotions towards potential losses than gains. In other words, they may be more motivated to avoid losses than to achieve profits. Contrarian traders can manage this fear of losses by staying true to their independent mindset and making decisions based on their analysis rather than following popular sentiment.
The impact of cognitive biases
Cognitive biases are inherent tendencies in human thinking that can lead to irrational decision-making. Contrarian traders often understand these biases and actively work to avoid falling prey to them.
One of the most common cognitive biases seen in stock trading is confirmation bias, where individuals seek information that supports their beliefs and ignore contradictory evidence. Contrarian traders, on the other hand, actively seek out opposing viewpoints and challenge their premises to make more informed decisions.
Contrarian traders also manage emotions such as fear and greed, often leading to impulsive decision-making. By understanding their cognitive biases, they are better equipped to stay rational in high-pressure situations and avoid making emotional investment decisions.