Saturday, May 10, 2014

Run With The Herd?

When we enter long in a trade, to make a profit, other traders must have to buy after or with us, so the price could move up and we can book a profit. The same theory also applied for short selling. So, in general a large herd must run with us in same trade and direction.

        So, does it mean we should always blindly follow the crowd and do what others are doing, the answer is no. It could be beneficial for sometimes but not always.

         We should always follow our strategy and rules to enter in a trade (like patterns), not just looking what others are doing. After that, direction of market and herd could be useful, but the first priority should be given to ourselves.

       For example, many people started to buy some xyz stock and raises the prices from 100 to 110 in only few trading davs, which was also strong resistance of stock. And we followed the crowd blindly, hoping it will go much higher, and entered long. Suddenly it started to fall and we have to book a loss. The reason for this failure is, when every buyer entered the stock and at the same time it is also touching its resistance level, then only sellers will enter in trade, who will took prices lower.

      The conclusion is, follow the herd only when they are trending according with some pattern or with your strategy, otherwise it will be better to put yourselves away.

1 comment:

Ssameer Suniel Limaye said...

Unbelievably true! Can't believe this is what happened to me as well.