Are We Lemmings or Are We Traders?
12/22/2015 6:00 am EST
For those traders interested in learning more about how to follow a strategy that cuts losses and stays with profitable trends when they occur, Frank Kollar, of Fibtimer.com, relates the urban legend of lemmings committing mass suicide to trading and suggests ways to avoid following the herd off of that cliff.
A few years ago I read an article that ended a long standing belief on my part. On an Urban Legend Web site, I discovered that lemmings do not herd together and commit mass suicide by jumping off cliffs.
Why I believed this in the first place I do not know, but I guess I never had any reason not to.
The legend apparently began when—during a 1958 Disney nature documentary—the film crew induced lemmings into jumping off a cliff into the sea. They then documented their suicidal behavior and used it in the movie White Wilderness.
There goes one more childhood belief.
Real Life Lemmings
But the suicidal behavior of lemmings, though not true of lemmings themselves, does have close counterparts in the real world.
What? Can this be true?
Think of any stock market bull rally that is nearing a top. Volume spikes as traders rush to buy stocks they would not have even looked at a few days or weeks prior. Sentiment is at bullish extremes and every industry, regardless of profitability, is relentlessly purchased to extremes of valuation.
In the very midst of this buying frenzy, when traders are going to bed each night and dreaming of being rich, there are those few individuals who refuse to be affected by the emotions of the rally. They start taking profits. Some start selling short.
Before long, even while the lemmings are still buying and trading volume remains high, there is a subtle shift. New highs are not held. New intra-day highs become losses at the close. Soon the shift becomes real selling and the deluge begins.
But the lemmings, who are emotionally still extremely bullish (running in herd fashion towards the cliffs) hang on. Finally, they start taking losses and as those losses grow, the lemmings start to feel the pain. They are not sleeping as well. The dreams are turning to nightmares.
Finally, the lemmings stampede. They start selling. The selling increases, and after a while, it becomes a deluge as all the lemmings try to unload their huge losing positions at the same time. They are now jumping off the financial cliffs en masse.
Real Life Lemmings Hit the Bottom
Now the lemmings have cashed out most of their positions. They have had it with stocks. They go to sleep with the security of knowing they will never put themselves in such a losing position again. Not ever.
As the lemmings take comfort, some astute traders see an advantage. They start buying into the severely depressed stock market. Slowly the market turns higher. More traders jump in and before long, another market advance is born.
Never fear, our lemmings will not be swayed. The vast majority of them, having been burned once, are not going to be burned again. Or so they say.
But oh, the easy money they are missing. The financial news talks incessantly about the profits being made. Their friends are making gobs of money or so they are told. Slowly but surely the lemmings start to buy and a new bull rally begins to form.
NEXT PAGE: Ever Experienced a Lemming Loss?|pagebreak|
The next cliff is waiting patiently for them. It happens over, and over, and over again. From Dutch Tulips, to great financial crashes. History always repeats.
The psychology of fear and greed has been repeating like this for hundreds of years. You would think the herd would get smart, but very few do. It is hard to change emotional responses that are hard-wired into the human psyche.
Do Lemmings Ever Evolve?
To answer this question, we must look at the very astute traders who are buying near the bottoms and selling near the tops.
Are they devoid of emotions? Are they like robots who are never swayed by the sentiments of the majority?
Actually, most were former lemmings. Experience is what makes a successful trader. Most have experienced lemming losses but these few realized it was a losing game.
The plain truth is; they are following a trading strategy. These special individuals, who realize profits year after year and are never in that crowd of lemmings who are jumping off cliff after cliff, are not lacking emotion.
They realized it was a losing game and they exited the emotional roller coaster that most stock market participants are riding and began following unemotional trading plans.
This is what FibTimer is all about.
We have been there ourselves. We understand the only way to profit in the financial markets is to part from the herd. We have done that by creating—and following ourselves—unemotional timing strategies.
Unlike many other timing services which apparently practice voodoo in their timing signals, we are trend traders. We do not sift through tea leaves to make our buy and sell decisions. We identify trends—and when a new trend is established—we trade it.
If the trend is false, we exit quickly. We exit our losing positions quickly and let our winning positions ride.
Unfortunately, many who look for timing services—and then start following a timing strategy—are actually looking for someone who can forecast the future. They want the crystal ball readers.
They want to believe. They are lemming wannabes.
They want someone to take their hand and lead them to untold (and guaranteed) wealth by forecasting the market's direction before anyone else knows it. They accept the offered promises of riches because they want to believe.
We have never found anyone who can foretell the future. Sorry about that. Of course, at every market top and every market bottom there is someone who got it right. But getting it right consistently is another matter entirely.
What we can do is tell you the truth. Successful trading, market timing, can only be attained following an unemotional strategy that buys low and sells high. By following a strategy that cuts losses and stays with profitable trends when they occur.
If you follow FibTimer strategies, do not expect us to follow the lemming herd. We stay far away from tea leaves. We do not keep financial news on when we trade. If we are bullish when the herd is on a buying rampage, that is nice. But when we have a sell signal, we are out. No questions asked, no second thoughts.
We are the anti-lemmings.
By Frank Kollar, Editor, Fibtimer.com