If everyone else is doing it ......don't
Most traders find comfort and confidence knowing that he or she is doing the same thing as everyone else.
Remember
that old saying we heard when we were a kid "if everyone jumped off the
bridge...."? Our parents encouraged us to resist doing what our peers
were doing if the only reason to do it was just because everyone else
was. When we were children our parents encouraged us to be independent
thinkers and to make our own decisions.
This is great advice for traders but is often forgotten.
Somewhere
immersed in the reality of growing up and the real world, many traders
forget about the importance of being independent thinkers and making
their own trading decisions. Instead, some traders gain confidence from
doing the same as what others are doing. However, there is truth to our
parent's advice that is especially true as a trader. To be a successful
trader you need to think for yourself.
RULE OF THUMB
My
rule of thumb when selecting trades is....if everyone else is doing
it....I won't. If you have heard of this great trade at a party, from
your hairstylist, or a television show, chances are that it's not a good
trade to take.
For example, most people will see a stock that
gaps down and short it. Then after a few days the stock will move back
up and continue its overall trend. People who placed that trade might
ask why didn't the short work everyone else was doing it.
TRADE MATCHING
The
reason is this; the market must have a buyer and seller for each trade.
The market thrives on balance. When all retail traders short a stock,
the market will become imbalanced so the natural gravity of the market
must be restored. Eventually the short side will be absorbed and the
stock will rebalance to its overall trend.
Thinking for yourself
when executing trades can be harder than you realize. It's easy to get
lulled in to the peer pressure of doing what everyone else is. But when
you take a step back and critically evaluate each trade, you have to ask
yourself if you found this trade on your own, would you have placed the
trade? I would actually argue that if you looked at the trade on your
own you would probably take the reverse side of what your "friends" are
telling you. As a trader you need to develop a much more sophisticated
approach to trading.
Now you may be asking yourself why on
earth would I not be satisfied with knowing that many other traders want
to place the same trade?
My reason is simple, if the masses are
on the one side of trade, you have to remember there is always someone
on the other side of that trade, and chances are the big guys (i.e.
banks, market makers) are waiting in anticipation just like hungry
crocodiles waiting to eat up that trade. I prefer to side with the
crocodiles and eat with them, as opposed to being their dinner it's
safer and a much more satisfying place to be.
Sara Potter
