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The trader and the crowd: not to be like everyone else, not to be against all

For many people the financial markets look like something like gambling or roulette, where you can easily earn money. Others see the mathematical and physical laws behind the changes in rates of securities, considering the stock market as a kind of scientific phenomenon. But ask a seasoned professional, what drives the prices in the markets - and he will surely respond with one word: "the crowd".

The hundreds of thousands of traders around the world are forcing the prices on Forex and other exchanges to take off into space, and then plummet. The crowd forms the market - but the paradox is that, by acting together with everyone, you have, mildly speaking, the low chances of making a profit. The exchange statistics is inexorable: Most traders lose money, and at best 10-15% of traders manage to make a stable profit.

Act like everyone

The vast majority of people feel an instinctive desire to "act like everyone else", not to stand out. This is normal; this is the nature of a man - plus, of course, the influence of the environment that we experience from childhood. This fact has long been repeatedly proved experimentally and scientifically confirmed.

The popular science film "Me and others" filmed in the Soviet Union in the early 70s demonstrated the experiments, which can be called "shocking." Thus, in one scene the children were acting as subjects. On the table there are two figures of different colors - black and white. First, three children (it has been agreed in advance with them) argue that both figures are white. When the fourth child who was watching has been asked a question about the color of figures, she has confidently copied this absurd "collective opinion". Moreover, the experiment was repeated also with adults with the same result!

This behavior is particularly dangerous in trading - and ends with very sad consequences for the deposit. Under the pressure from the promising news and forecasts of the authoritative market gurus, it is difficult to remain faithful to its original trading plan even for an experienced trader, not to mention the newcomers. But that's what the difference of a successful stockbroker is: He thinks only for himself, he should have enough strength and confidence to confront the "collective psychosis" and continue to adhere to his own "rules of the game."

All run - and I ran...

And now let's look at the typical behavior of a novice trader or investor. Technical analysis and trading system do not set clear signals about the trend continuation, the logic and common sense tell us that at the moment it is better to refrain from the position opening - for example, to wait for the breakdown with the price of a certain level or exit the "triangle."

At this time the news are talking about the rates rise, the analysts broadcast about the urgent need to buy "on everything", and a successful trader-colleague cheerfully tells you by the phone that he has mortgaged the flat of his mother in law to buy more "promising" shares. Well, how not to succumb to a mass psychosis?

In the end, having forgotten about his own trading system, the trader opens long positions - and most often becomes "that guy" who bought his shares on "Hi". That is, at the highest prices, after which there was a strong pullback (if not collapse) of the market. Hoping for a good profit, in the best case the trader has received a heavy "stop-loss" - if he did manage to close his loss-making position in time.

Do not stand on the way

The above situation is known to many market participants - unfortunately to many people it is known by their own sad experience. Open the chart of any financial instrument - and you will certainly find a lot of things when the price stoops down on the "stops" of too optimistic "bulls" and on building positions of patient "bears". Although in the example described, the upward trend could continue for a long time - the power of "the crowd" is great, and no one knows when it will run out.

Let's imagine that in the situation described above the trader decided - again, without any system or analysis - that "the crowd is always wrong", and now is the best time for opening the sales. However, the growth in the wake of general optimism can last several days or even months. Have you watched like after the important level breakdown the rate rapidly shoots up (on the up-trend)? These are the "bears" that massively cover their positions - of course, under the pressure of the crowd of "bulls".

It is risky to go along with the crowd, but it is deadly to go against the crowd. Such actions are like trying to stop the train or a herd of buffalo abruptly hurtling at full speed.

Some tips

The "crowd" is strong, but not omnipotent, it is not necessary to be afraid of it, as well as to rely on it too much. Experienced traders dedicate a lot of time to study the psychology of market participants' behavior - and this gives them one of the keys to profitable trading. Although, of course, it is not enough to achieve success on the stock exchange: no less important components are the own system with the conditions for opening and closing the positions, self-discipline and money management clearly spelled out.

It is important to understand that the arguments of the analysts or an opinion of the majority are not reasons to open the transaction. On the other hand, this does not mean that it is necessary to make everything to the contrary. Any actions on the stock exchange shall be compared with your own trading system tested on the history. You do not know what it is? Then, perhaps, it will be better if you give your money to the professional manager – before it becomes an easy prey in the market.

Try to control your emotions, work on your own trading rules of entry and exit from the transaction, learn to stick to them, and gradually you will be able to "get rid" of the third-party influence. You'll understand that the "crowd" - and thus prices on the market - are controlled by rather primitive desires, which can be figured out in advance and with a high level of probability.

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RISK WARNING: Trading of complex financial products, such as Stocks, Futures, Foreign Exchange ("Forex"), Contracts for Difference ("CFDs"), Indices, Options, or other financial derivatives, on "margin" carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading these markets, and seek advice from an independent financial advisor if you have any questions or doubts. Please carefully read our full "Risk Disclosure" and "Risk Disclosures for Financial Instruments & Investment Services". FXFINPRO Capital is the trading name of PFX Financial Professionals Limited, a limited liability company formed under the laws of Cyprus, registered with the Registrar of Companies in Nicosia, Cyprus, under nr. HE 237840 and regulated by the Cyprus Securities and Exchange Commission with license number 193/13.
The CIF license of PFX Financial Professionals Ltd has been suspended by the Cyprus Securities and Exchange Commission until the 24th of December 2016. Please click here