When To Follow The Crowd And When To Go Against It
Don’t follow the crowd! You’ve been warned over and over, but few are that independent. Breaking away is harder than it looks. We are all familiar with the rebel, the person who breaks all the rules. At the other end of the spectrum, the ultra-conformist seems to follow the rules too blindly. Neither extreme is optimal for trading. It’s necessary to find the right balance. It takes a good deal of experience, soul-searching, and a concerted effort to act independently. It’s essential to develop this skill, especially in markets that seem to change from month to month.
We all have a natural tendency to follow the crowd. There is safety and comfort in numbers. As the human race developed, it learned that its survival depended on banding together and working as a group. We inherited this legacy, and it is shown in the security we feel when we follow the crowd. Without getting into individual differences or the extent to which one follows the crowd, some conform too much and others too little, most successful members of society have seen the virtues in following the crowd. Blind obedience to authority may not be beneficial, but compromise is, to be successful, to protect your self interests, and stay within the bounds of acceptable behavior. You must develop a clear and solid sense of personal values and to develop a clearly defined personal identity. You can then follow the crowd when appropriate, but effortlessly go your own way when it’s necessary to protect yourself.
Although you’ve been frequently warned about the pitfalls of following the crowd as a trader, acknowledge that it is adaptive at times. In the case of long term investing, for instance, it is wise to put your money in stocks that don’t have a great deal of volatility and by all indications, have solid fundamentals that will push the stock up on a fairly consistent basis for several years. If a large enough “crowd” believes strongly that the company will produce profits for months or years, it would be to your advantage to follow them, if you want a safe investment.
Following the crowd isn’t bad all the time, especially for those who don’t like risk. On the other hand, if you are a shorter-term trader trying to profit in markets that seem to change from week to week, as we are seeing these days, you must anticipate and profit from volatility and shorter-term trends. This requires an astute intuition about where the markets will go next. Anticipate how the movement of the masses can benefit you as a trader. The key to success is to decide when to follow the crowd and when to go against it. The crowd is usually right, until a turning point occurs.
When virtually everyone has taken the position that the market is headed up, let’s say, there are few traders left to buy and push the trend further. Soon, a countertrend initiates and moves the market down. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy, but in practice, it is difficult to implement a trading strategy to capitalize, especially when they happen in the shorter-term, such as days or weeks. How can one predict the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time but also admit that it may fail. You must at least temporarily believe in your method, put money on the line, and work under the assumption that overall, luck will be in your favor should you make enough trades.
It seems like the markets these days are changing from week to week, with weak economic news lowering prices one day and unexpected profits in key sectors raising prices the next. Only the most independent minded and perceptive traders will make a killing. But one thing is certain, in the end, going your own way is the only sure path to profits.
