The saying ‘follow the crowd’ be further from good advice regarding trading. But what is it exactly and why is it such terrible advice for all traders, especially novices? In this article, we will examine the term crowd mentality and why you should steer clear of the herd when trading CFDs.
What is crowd mentality?
Crowd mentality refers to how those around them can influence people. In a crowd, individuals may act in ways they would not normally behave due to the pressure of conformity. This behaviour can lead to a loss of individual judgement and a sense of personal responsibility.
Crowd mentality can often be seen in mob violence or riots, where the group’s actions override any moral inhibitions. It can also lead to herd behaviour in financial markets, where investors buy or sell based on the actions of others rather than on their analysis.
While crowd mentality can have negative consequences, it can also lead to positive outcomes, such as acts of altruism or collective action. In any case, it is an important phenomenon to understand.
Why you shouldn’t follow the crowd when trading
When trading CFDs, you should always go against the grain and trade in the opposite direction of most other traders. Here’s why.
The herd mentality can lead to wrong investment decisions
Traders often need to make split-second decisions based on complex data sets. In some cases, these decisions can differ between profit and loss. Unfortunately, the pressure to make quick decisions can sometimes lead to trades based on emotion rather than logic. This phenomenon, known as the herd mentality, occurs when traders follow the lead of others without thinking for themselves.
The result is often a self-reinforcing feedback loop that can cause prices to spiral out of control. While the herd mentality can occasionally lead to profitable trades, it is often the cause of bad investment decisions. Traders must be aware of this phenomenon and think for themselves when making trading decisions.
Investors who blindly follow the crowd often don’t do their research
Investing in the markets can be tricky, and there’s no sure-fire formula for success. However, all successful investors have in common that they do their research before making any decisions.
Often, people let themselves be swayed by the ‘wisdom’ of the crowd without taking the time to understand what they’re investing in. It can be a recipe for disaster, as blindly following the herd often makes poor investment choices.
When it comes to investing, it’s essential to think for yourself and not simply follow the crowd. Evaluate potential investments carefully and understand the risks before putting your money down. It may take more work than simply following the herd, but it will pay off in the end.
Crowd behaviour is often irrational and can lead to market crashes
Individual traders have a much better chance of success if they make their own decisions.
Many people believe that the best way to invest is to seek out the advice of professional financial advisors. However, this is not always the most effective strategy. Individual investors often have a much better chance of success if they make their own decisions. There are several reasons for this.
First, financial advisors often have a conflict of interest when giving advice. They may be incentivised to recommend investments, not in their clients’ best interests.
Second, even the most experienced advisor cannot know everything about every investment, which means that they may make decisions based on limited information.
Finally, each person’s financial situation is unique, and what works for one person may not work for another. It means that the investor is often the best person to make investment decisions, and individual investors are often better off making their own decisions when it comes to investing.
To summarise
As with any other form of trading, there is no guarantee you will make money when following the crowd in CFD trading. In fact, by doing so, you may increase your chances of losing money. To succeed in CFD trading, it’s crucial to develop a sound strategy and stick to it.
Don’t let yourself be swayed by what others are doing – focus on making informed decisions based on your analysis and research.
You can become a successful CFD trader by going against the grain with a bit of practice and patience. To start trading today, you can open an account with Saxo markets.
