The secret to trading success is not really a secret at all. It’s something I talk about a lot, and that thing is mindset. Traders love to follow the crowd. They all can’t be wrong, can they? Trust me: They can, and that means you will be wrong, too.
From an investor’s standpoint, we can certainly agree that if you put your money in the markets, your wealth will increase over the long term. A solid, intentional investment plan benefits from compounding. High yield investments can also grow your wealth, but for this blog post, let’s focus on trading over investing.
Following the crowd is not a good trading strategy
Watching sentiment indicators is important of course, but following those indicators exclusively will quickly get you in trouble. When the crowd is leaning heavily to one side, it’s already too late to make money trading from that side. Markets move very fast, and a trader’s emotional drivers – fear and greed – move the markets like a wave. There’s a build up and then … crash.
Imagine being on a small boat with 50 people. Forty-eight of them are on one side of the boat. It won’t take long before they are in the ocean and trying to get back into the boat. Meanwhile, the other two people are safe and dry. Trading markets is the same. If you follow that crowd – the one that is leaning very strongly on one side – losses are sure to follow.
The nasty bear market that we are in has taken its swipes at just about everyone. That’s how bear markets work. Over the past five months, we have seen markets fall four or five times and suffer through the worst start ever for the first 100 trading days in any given year.
Despite the nonstop down trend, some traders have decided to take a bullish stance in the throes of a selloff. Wrong move. Never fight the markets, and never ever fight a bear market. Doing so has cost these traders dearly. If you followed them, you know that all too well.
The secret to trading success
Don’t follow the crowd. Wait for the change in trend – it will come one day! You don’t have to be first to jump on the trend, but you do have to wait for the signs and then carefully plan your move. Most traders won’t wait, but the ones that do will be rewarded.