Investors will hear or read about Wall Street professionals using contrary or contrarian indicators to predict which way asset prices will move. While the concept can be confusing to new investors, it may be particularly relevant now.
Put simply, a contrary indicator is one that tells you it may be a good time to invest in the opposite way from the herd.
“Remember, the market is designed to fool the majority of people most: That’s the basis for contrary indicators,” says Steven Strazza, a technical analyst at All Star Charts. Among many other tools, technical analysts, or chartists, use historical price-chart patterns to forecast where asset prices will move next.
“Most contrary indicators work best when at extremes,” he says.
That means if a contrary indicator shows that investors are overwhelmingly bearish (believe stock prices will fall), then it could be time to be bullish (expect the market to rally).