Contrary opinion is almost exclusively used with stocks.
Contrary opinion is based on a simple principle: For a stock’s price to rise, there has to be a surplus in demand. For a stock’s price to fall, there has to be a surplus in supply. Contrary opinion is trying to find out if there are enough traders on either side to allow this side to dominate.
To accomplish this goal, contrary opinion measures the market sentiment. Then, it indicates how many traders are currently bullish and how many traders are currently bearish. For the market to rise or fall, traders have to switch from one side to the other.
If too many traders are on either side, so the logic behind contrary opinion, there are no traders left to switch to this side. Therefore, the market cannot move further into this direction. Logic dictates that more traders have to switch from the side almost all traders are on to the side almost no trader is on. As a result, the market can only move into this direction.
The great advantage of contrary opinion is that it can explain otherwise unexplainable reversals. Sometime all technical and fundamental factors point to the continuation of a trend, but the trend reverses anyway. Contrary opinion can help you discover these situations, and make money with them instead of losing money.
Contrary opinion is especially helpful after a long upwards or downwards trend. Especially trend followers can use contrary opinion to evaluate whether they still can trust a trend or not.
The classic approach to contrary opinion is using a provider that sends you data about the dominating market sentiment. To evaluate the current market sentiment, these provider poll traders or evaluate trading newsletters. The result will be calculated as a percentage value from 0 to 100. If most traders and newsletters are bullish, the value will trend to 100. If most traders and bearish, the value will be trending to 0.
Conventional contrary opinion indicators focus on too long time frames to be traded directly with binary options. Most providers deliver their data either once per day or once per week. Luckily, there is a free alternative that works on any time frame: Contrary opinion oscillators.
Contrary opinion oscillators try to do the same thing as conventional contrary indicators, but use market data to determine if traders are currently bullish or bearish. As with most technical indicators, contrary opinion oscillators are based on the believe that traders’ past actions allow for accurate predictions about what they will do in the future.
One of the most popular contrary opinion indicators is the money flow index (MFI). The money flow index measures three market data: The volume, the direction, and the reach of each individual period. It then compare how many traders have invested in rising prices and how many traders have invested in falling prices.
As with conventional contrary opinion oscillators, the result is then plotted as an oscillator value from 0 to 100. Any value over 80 is considered overbought, any value below 20 is considered oversold. When the market reaches either extreme value, a reversal is likely to happen soon. Look for additional indication of an impending reversal and invest as soon as you find them.
Divergences create an even stronger signal: When the market reaches a new extreme without the oscillator reaching a new extreme too, the current trend is in deep trouble.
Generally, you can use the MFI with any time frame. Be aware, though, that the erratic market environment on 30 and 60 second time frames make the use of contrary opinion oscillators less effective. On longer time frames (from 15 minutes upwards), however, contrary opinion oscillators can help you make money with binary options. The longer the time frame, the better.