Archives of “herd mentality” tag

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Fear and Greed

  
Analysis, Education
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Greed and fear are borne from the same parents. They feed on each other. A falling market prompts more selling just as a rising market feeds on itself. 
It’s a concept that I just had to learn myself.

Why do stocks that are undervalued continue to be undervalued? 

Why do stocks that are overvalued continue to be overvalued? 

These momentum types of traits are of the same nature.

Fear prompts more aggressive panic selling ; that’s why stocks that are already slumping continue to be sold and enter a vicious cycle ;

Could be margin calls causing them to fall even further . 

 This same self reinforcing process operates in the same way on why stock prices can be propelled into the stratosphere. A great story can go on forever whenever the herd mentality is strong. Investors copy each other buying and selling. Greed prompts more euphoria until the loudest and most vociferous voice of the bull market must admit that the honeymoon is over and when it happens; it is a sobering and humbling experience.
When these happen; the most conservative option is to cut costs and hope for the best.

4 Pillars of Trading

  
  Education
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4 Pillars

I “see” the market through the lens of four primary metrics: fundamentals, technical, structural and psychology.

When viewed in isolation, each of those approaches has inherent flaws.

1. Fundamentals are best at the top and worst near a low.

2. Technical indicators often trigger buy signals higher, on breakouts, and sell signals lower, after a stock has broken down.

3. Structural factors — debt, derivatives and currency effects — can self-sustain in a cumulative manner until such time they overwhelm the system.

4. Psychology, such social mood and risk appetites, can gain momentum until they snap under the weight of the herd mentality.

Jim Chanos On Short Selling: The Power of Negative Thinking

  
Analysis, Education
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Short selling and Jim Chanos go hand in hand. Whenever you see his name, you instantly think of Enron and how he unveiled the fraud there. The Kynikos Associates hedge fund manager is worth following due to his success but maybe more-so for the fact that he makes so many public appearances. If hedge funds operate behind a shroud of secrecy, then short sellers typically operate behind a shroud ten times as secret. Yet Chanos deviates from the norm and can often be found on television, doing interviews, and sharing his ideas. While talking his book might help some of his positions, it also means he’s more often than not cast as a villain. Chanos argues that good short sellers are born, not trained. Many would take issue with that statement as numerous hedge funds recommend their analysts read Kathryn Staley’s book, The Art of Short Selling

to really gain an edge.

In late May, Chanos delivered a presentation at the CFA Institute’s annual conference. You’ll remember that Baupost Group’s Seth Klarman also spoke at this event and we previously covered his thoughts on the markets

as well. This time around we present you Chanos’ speech entitled, “The Power of Negative Thinking” which focused on his bread and butter: short selling. (more…)

Herd Mentality

  
  Education
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“Making money is easy, it is keeping it that is hard.” 

Keeping the profits is what successful trading is all about. It’s not about making money. It is about risk management. Good risk management translates into good profits. Great risk management translates to great profits and a long-term career.

So what about the herd mentality?

You have all heard about it over the years. Psychologists talk about it all the time, but how does it play out in the applied trading world?

The cliché is that following the herd is dangerous – bad for trading and leads to huge losses.

But my perspective is different and one that states that following the herd is  bad only if it was not YOUR game plan. You see, traders don’t mind losing money. That’s right. They don’t. What they mind is losing money doing stupid things. And one of the stupidest things a trader can do is to follow someone else’s game plan instead of their own.

If you are going to lose money (and you are going to about half the time) then you might as well lose it doing the right thing, which is listening to YOUR ideas. Your instincts. Your research and YOUR game plan.

Trading is not complicated. We make it complicated.

Simplify the process. Break your trading down to its basics and follow your plans. And if your plans happen to be in line with the herd, then so be it. And if they don’t, that is fine too. The point is to be consistent in your approach and let the market come to you.

DAY TRADING LESSONS

  
  Education
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daytradinglessons-update

  • Trading is a continuous learning process

  • Don’t trade without a plan. Be as prepared as possible. Don’t try to be right
  • Emotion is a much bigger influence in stock prices than any other factor
  • The market reacts more to sentiment than facts. Herd mentality rules
  • Sell into strength and buy into weakness
  • Market always rewards minority, not the crowd. The trick to figure out if the mass perception is wrong and WHEN it will be proved to be wrong.
  • Technical setups and money management are more important than fundamental catalysts when trading
  • Always ask: What beliefs are you acting upon? What is the basis for those beliefs? Why do you have those beliefs now? Would those beliefs be different if your recent gain/loss record had been reversed? Can you clearly enumerate what could happen that would cause you to change your mind?”
  • Extreme emotions cause extreme pain. I’ve learned how not to get overly bullish or bearish
  • Be mindful of higher trading volume on down days prior to a future catalyst as bad news can and often does leaks out
  • Take responsibility for your own trading
  • Cut your losses, let your winners run, and this is more easily said than done
  • If you can’t focus, you can’t trade. Be in the zone or stay sidelined
  • Buy below value and well below value if possible
  • Being flexible can be fruitful
  • Let the market come to me and don’t force trades
  • It is never “different” this time
  • Just more……….very soon ,Till then just read these and learn something new.
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