The following article aims to provide:
- Common examples of knowingly or unknowingly following the trading herd
- The reasons why following the herd forces any kind of consistent profitability to remain a dream
In trading there is only one way to make a profit, and that is by selling something for a higher price than you paid for it. Yes, this is an over-simplified description of something that is much harder to do than to say, but this doesn't make it any less true. Even in a market like Forex where opening a short position is as easy as opening a long one, it is simply the difference between the the buy price and the sell price that determines your profit or loss, other than the trading expenses of course.
But this has a very real complication in the reality of the markets. You cannot open a trade and expect to keep it open indefinitely, or even until you find a favorable price in order to close the trade, that would be a recipe for disaster. The market can move against you and maintain that move for much longer than you can endure it. That would either require an unlimited availability of funds (and risk tolerance) to maintain a position that keeps moving against you, or would force you to trade an extremely small, insignificant amount that wouldn't be worth your time and effort even if it went your way. So instead of wasting your time and wealth, in an optimal situation you would be trading an amount that is neither totally insignificant to you, nor significant enough to allow any specific trade (or group of trades) to cripple your finances and wealth. This would of course require you to manage your trade, i.e. to enter with some degree of accuracy near a beneficial price, to set a stop-loss order at an optimal point where you are not risking too much while also making it hard for price to reach that point, and of course to have an idea of when to exit the trade in order to take a big part of your profits off the table (which is hopefully why you entered the trade).
Without consistency all you have is some trade that ended up working in your favor for any reason, and is just another trade in a group of low-probability trades that just keep eroding your wealth over time despite all the occasional winning trades
At this point you should ask yourself, is that even possible to do profitably while also following the trading herd? Could you possibly be doing what everyone else is doing and expect to somehow be profitable? If you have a basic understanding of how the markets really work then you already know that this nearly impossible to do. You cannot be following the herd or be a part of it in any way and as a result increase your wealth over time. The most important factor would be missing: consistency. Without consistency all you have is some trade that ended up working in your favor for any reason, and is just another trade in a group of low-probability trades that just keep eroding your wealth over time despite all the occasional winning trades. It makes profit look more like a loan that will eventually be returned to the market, with interest.
Keep in mind that banks and institutions make the vast majority of their trading profits from the masses by being on the other side of those novice trades. And apparently it is not even that hard to lead the majority of the herd right into low-probability trades against a virtual trading wall of Supply/Demand imbalance in order to take the other side of their trades just when price is about to react to this imbalance. And we are talking about an imbalance that sometimes is even directly visible to the institutions due to their access to otherwise private order information. So the most usual case is for the largest part of the herd to be on one side of the trade, and those that make money on the other side. And this applies to all timeframes simultaneously, with trades in any direction. As a famous example says, if you force two novice traders to trade in opposite directions (i.e. one long and one short), they will likely both lose money, while if you force two professional traders to trade in opposite directions, they will likely both make a profit. There are very specific reasons for being able to make a profit on any timeframe and towards any direction, but following the herd is definitely not one of them.
Jumping into the market after a large move is already under way is a clear example of following the herd
Jumping into the market after a large move is already under way is a clear example of following the herd. Imagine that a novice trader who had absolutely no suspicion that the market is much more likely to react one way than another near a specific area, sees the move unfold and uses this as the main justification to enter into a trade, trying to catch a part of the move, while it lasts of course, which could come to an end at any time. Entering such a trade only helps to pay those that created the move, and whether or not the novice trader will be lucky enough to make any profit at all on such a trade will depend on how much of the herd will enter the trade even later than the novice trader did. And that might not even help at all depending on how soon will profits be collected by those that created the move, and what other opposing market forces are likely to act at any time and for any reason.
As explained in other articles, the reasons for novice traders to enter the market are countless. They range from using indicators and oscillators to determine entry and exit points, all the way to using patterns with fancy names, or incorrectly trading the news, or following a trend just before its end, or jumping on a move at the worst time trying to catch a part of it, or sometimes even for no specific "reason" at all. If you are a novice trader and you have never before known any kind of true trading "edge" then at least you have a possible excuse, you might have been trying to learn more and figure out the markets, and this might involve a lot of spontaneous or completely unjustified trades initially. But if at some point you have gotten past the arbitrary indicator/oscillator make-believe correlation to any consistently actionable market clues, or possibly past the social-trading circus and/or the EA/bot madness, or even the various martingale/grid style desperate strategies that belong to the "gambler's fallacies" category and usually appeal only to the most novice of traders, then you are probably starting to realize that none of that is based on any kind of objective market information. All the above are just popular excuses used as seemingly "valid" reasons for entering the market. From one point of view this is a sad reality, but from another harsher point of view this is great because it is this difference in opinion and attitude that creates a market.
It is this difference in opinion and attitude that creates a market
Of course there can be more than one correct way to trade a market, where "correct" should be interpreted as "consistently profitable in the long term over a meaningful sample of trades". Sometimes it even depends on the additional information and tools that you have available as a trader, both of which you can assume are different between e.g. institutional traders and any random retail trader. The reason we are so fond of Supply and Demand trading is because it is the only way to bridge this gap by using objective market information that is commonly available on the charts, at least to the trained eye. It might not be equivalent to knowing a large part of the exact orders in a market as is usually the case with some banks and institutions, but being able to indirectly extract the likelihood of a market reaction to a specific area is probably the next best thing available to a non-institutional trader, including successful independent professionals.
Supply and Demand level trading still largely remains a strategy used mostly by professional traders, whether independent or institutional, and whether used alone or in combination with other privileged tools and information. The masses are too busy trying to find the holy grail of trading in knowingly or unknowingly following the herd. They might think that a different or unique combination of indicators and oscillators is what sets you apart from the rest of the herd, or that some other equally misunderstood and commonly misused tool or method will take them straight into profitable trading. Well, in the recent years they even started thinking that following other members of the herd (through what was eventually named "social trading") will actually set them apart from the herd they follow, i.e. make them profitable consistently, when the herd is really not.
And this is one of those cases where partial knowledge is worse than no knowledge. Believing that the performance depicted on some social trading profiles has much to do with reality, i.e. that it cannot be manipulated by clever but relatively simple tricks (some of which can even easily be found online), or that a social trading website cannot be made to display otherwise real data in a very misleading way without novice traders even realizing what exactly they are viewing or why it is invalid and misleading information, is a sign of ignorance or naivety displayed by many traders. Meanwhile, those who can identify objective market clues and use them in a prudent way keep getting paid from all the rest that are still lost in the maze of illusions and remain unable to see the market work in front of their eyes.
Those who can identify objective market clues and use them in a prudent way keep getting paid from all the rest that are still lost in the maze of illusions and remain unable to see the market work in front of their eyes
Yet in order to follow the herd a trader does not even have to be deluded by any of the above. You might leave a novice trader alone in a room with none of the above available (or even known), and the most likely trade will still be one that somehow follows an existing move instead of anticipating the next one in order to convert it into profit. It will usually be a trade that involves buying when price has already become expensive, and frequently just before price is expected to become cheaper due to nearby Supply above. Or it will involve selling when price has become almost as cheap as it is going to get in the foreseeable future, and very close to some Demand level below that is very likely to cause price to jump higher, whether it is for a simple bounce, a swing trade, or a complete trend change. Even if price eventually follows the desired direction, in most cases it will be after the novice trade has been stopped out of the market.
As we often like to say, if you cannot spot the novice trader on your charts, then you are the novice trader. If you are not aware of the lowest probability trade, then you are unlikely to ever take the other side of such a trade. Any winning trade will be mostly due to luck than due to skill, and the bad thing about luck is that it is not consistently repeatable. And what's even worse for the novice trader is that those occasional winning trades will be incorrectly attributed to irrelevant factors or methods, thus falsely justifying even more similar low-probability trades in the future. If you are wondering whether you have been partially or even completely following the herd and whether you have been routinely engaging in any sort of low-probability trades, you only have to look at your account balance and compare it to what it was some months ago.