Why the Popular Trade Is Rarely the Best One

I spent over 35 years working my way to the top on Wall Street…

And I spent decades running a hedge fund ranked in the top 1% by Barron’s.

I learned a lot during all that time… and made a lot of money… but now, I’m in the “giving back” phase of my life.

That’s why I left Wall Street to run the Opportunistic Trader advisory services for regular folks.

And it’s why I spend so much time trying to share my experience with readers like you… to help make you better traders.

Recently, I’ve opened up about my top trading rules. You can catch up on any rules you missed in Part One, Part Two, and Part Three.

And today, we’ll finish with my final rule…

Trading Rule No. 7: The Best Trades Are Contrarian Trades

The popular trade is rarely the most rewarding one.

When the market is heading strongly in one direction (like this year), you must be willing to do the uncomfortable, sometimes illogical thing and trade in the other direction.

The herd mentality is dangerous. It’s what leads to bubbles… and crashes.

The people who get burned most in those trading environments are the ones who pile into the most popular trades.

That’s why my money management firm was able to make $95 million in the 2008-2009 financial meltdown – while countless other firms had to shut down.

We saw it coming and prepared accordingly. People thought we were nuts, of course.

The prevailing narrative was that stocks and real estate would stay strong well into the foreseeable future. And, of course, that’s far from what happened.

It’s how we succeeded again in 2022 during the volatility and whipsaw moves the markets threw at us.

Ultimately, playing the contrarian trade is how you get those big, blowout, once-in-a-lifetime returns.

If you’re able to spot the holes in the prevailing investment narrative, you’ll be in a position to counter the narrative… and make a killing while everyone else is getting killed.

And that’s a trading tactic that we’ll continue to use in 2024.

Despite the upward pressure in the market, this rally feels vulnerable. As I shared yesterday, much of the uptrend relies on just a few stocks…

Whether it’s rate cuts, geopolitical action, or some other catalyst, any sign of weakness could lead to a pullback.

Obviously, there’s some nuance to how to position for this. There’s good reason for the saying, “Markets can stay irrational for longer than you can stay solvent.”

But that doesn’t mean we can’t profit in the meantime with some nimble contrarian trades.

That’s what we did recently in One Ticker Trader with our 22.4% gain using put options on the Invesco QQQ Trust Series 1 (QQQ). Put options benefit as the underlying asset falls.

And ultimately, we can be ready in the wings as soon as the first real tremors start to ripple through the market.

I hope you’ve learned something from these trading rules I’ve shared… and I’d love to hear your thoughts and questions. You can always write in to [email protected].

And as always, thanks for being a reader.

Larry Benedict
Editor, Trading With Larry Benedict