Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The Trader's Dilemma: Safety in Numbers or an Army of One
01/13/2016 8:57 am EST
Frank Kollar, of Fibtimer.com, points out that a trader’s ability to break away from current sentiment may have a lot to do with his personality and how—in trading and in life—striking out on one’s own can be very advantageous.
Humans have a natural tendency to follow the crowd, but when timing the markets, following the crowd can often result in losses.
Unless you are in the middle of a long-term trend, it usually doesn't work to conform to the masses.
Expert market timers know how to spot trends and they make sure to climb on board and profit. But often, the very same buy and sell decisions, which must be executed to jump on board that trend, are in direct conflict with current market sentiment.
It is not easy to make that trade when it conflicts with what seemingly everyone else is doing.
Interestingly, your ability to break away from what the masses are doing—from current sentiment—may have a lot to do with your personality.
Following the Crowd
There is safety and comfort in numbers, in following the crowd. Across the generations, people learned that survival depended on banding together and working as a group.
All humans inherited this legacy and it is shown in the security we feel when we follow the crowd.
The most successful members of society have seen the virtues in following the crowd. They have learned to look for rules to follow and to decide which standards to strive for. Blind obedience to authority may not be beneficial but compromise is.
To be successful, it was vital to protect one's self interests yet also stay within the bounds of acceptable behavior.
Although you've been frequently warned about the pitfalls of following the crowd, it's important to recognize that it is a survival instinct that is ingrained not only in humans, but in most animals too. Think of herds of deer, flocks of birds, swarms of insects, schools of fish. There is safety in numbers.
Going Our Own Way
Although following the crowd isn't bad all the time, such as during a long-term rally, there are times when a market timer should not follow the crowd.
If all we had to do to be profitable was follow our instincts, we would likely be making the same buy and sell decisions as the vast majority of traders. But just as the vast majority of traders are not profitable...as market timers we want to break away from their emotional trading and be profitable. To read the entire article click here…
By Frank Kollar, Editor, Fibtimer.com
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