What It Means
A contrarian indicator is a signal that traders deliberately read against the crowd. When it shows sentiment pushed to an extreme in one direction, it's often interpreted as a sign the market is due to move the other way, rather than confirmation the crowd is right.
How It Works
The logic behind reading indicators this way is positioning-based: once almost everyone who wants to bet on a direction has already done so, there's less fresh money left to push the move further, which leaves room for a reversal. Put Call Ratio at an extreme, RSI deep in oversold or overbought territory, and a sharp spike in the VIX are all commonly read this way.
Example
A Put Call Ratio pushing past 1.5, usually the sign of heavy put buying, gets read as contrarian bullish rather than bearish, on the logic that the selling has gotten crowded rather than that more selling is coming.
Related Terms
- Oversold — a common contrarian reading on a sharp price fall
- Overbought — a common contrarian reading on a sharp price rise