“Buy low, sell high” – Easy enough, right? If only. If only trading were that easy. The irony is that It’s not because buying low and selling high doesn’t work – it’s because most of us, time after time, fail to overcome herd mentality. The fact is, traders are known to buy at the high, and sell at the low. In the former, this is what we refer to as FOMO, when the masses of retail traders are buying around a market top, exposing our fear of missing out on those market moves (insert chart examples). In the latter, it’s known as “panic selling”. Volume drops when markets crash – meaning people don’t typically buy, but rather sell at the low.
Good example of buying/selling at wrong positions – look at ES (SP500 / SPX) chart
(5 days, 15 minutes timeline)
In order to make trading profitable, we must be able to overcome this herd mentality. We have to approach every decision logically and stoically, sticking to the trading strategies that have shown to work. Unfortunately, this ability is easier said than done, and that boils down to several reasons, almost exclusively having to deal with human psychology. If you’re a psyche major, you can use your understanding of human psychology to your advantage against herd mentality. In understanding these human conditions, we can use this knowledge to battle against our own subconscious tendencies and form trading strategies against the herd.
Anyway, I digress, here’s the bottom line:
- Humans have a tendency to do what everyone else is doing. Most traders, if they see everyone around them buying, will jump on the bandwagon believing that it must be the right time to buy. The same is true for when everyone is selling, it must be the right time to sell. While we have to find the right timing and entry point, if we want to be a profitable trader, we must often trade inversely to what everyone else is doing. There’s more money to be made in trading inversely to the herd.
- Market crashes scare people – while market bubbles excite people. This is something that is incredibly difficult to overcome on a personal level, but when effectively overcome, a whole new level of strategies come up. For traders who truly uphold the “sell high, buy low” strategy, market crashes should excite us, while market bubbles should scare us.
- Humans hate losing money. That is a fact. All of us in some way have identified money to aspects of our identity, and in extreme cases, some people even equate money to their self-worth and motivation to live. This is a dangerous mindset, and this unhealthy attachment to money can influence a trader to make irrational decisions even when there are well placed positions and strategies. As a trader working against herd mentality, you must be able to almost enjoy losing money. At the very least, you must be okay with the idea that you might lose everything you trade. An advanced trader can take losing money, in a controlled and expected manner, and strategize to take medium to long term profits – Details on how to do that will be covered in another article.
- Humans have a bad case of FOMO – Fear of Missing Out. This is an incredibly powerful drive within us, that pushes us to conform in fear of being isolated or ostracized. It’s the act of jumping into positions, trades, or investments out of a sense of FOMO, or the lack of patience, rather than a well-timed and calculated move. Again, patience here is key. There is rarely any rush to jump into markets (I say rarely because sometimes we do need to act urgently). The markets provide plenty of opportunities but we have to be patient for the right one that suits our expertise and capital. We’ll be far more profitable if we can stand by and wait sometimes.
The markets and how the herd trades are highly influenced by human psychology. The more we understand herd mentality and the subconscious tendencies within us to follow the sheep, the better we can overcome our human weaknesses and develop alternative, and profitable perspectives. My hope is that together we can work on developing mental/emotional strength and maturity to handle and approach our investments with confidence and make some money along the way.
– Clarissa Thrasher, Author for Market Pathway
Clarissa Thrasher is a part time fitness professional and part time derivatives trader. As an educator and writer, she combines her years of experience in financial markets with a passion for helping others. Her goal is to help fellow millennials develop financial freedom by guiding our readers and subscribers through the process. Clarissa is Market Pathway’s lead author and co-founder.