Fighting the Herd

Today I had the opportunity to listen to a great podcast interview with Barry Burns. Barry is a pure technician and has a Ph.D. in hypnotherapy which seemed to give him a very holistic view of the markets which I found very insightful.

In the interview Barry made one very salient point regarding how human psychology leads to herd like behavior in many circumstances and especially in markets. I will do my best to reiterate his main point and flow of thought as I found it to be most valuable.

Burns takes the idea of herd mentality in human psychology and applies it to the financial markets, noting that the vast majority of people who attempt to succeed in trading ultimately fail. However everyone who attempts to trade in the financial markets thinks of himself as the exception, HE will be the one who consistently takes money from other traders, speeding in his Ferrari on the road to opulent riches. Yet by establishing that belief and mentality traders are in effect succumbing to the mentality of the herd and as we all know, most traders are unsuccessful.

So how does one overcome this contradiction? How can a trader go into trading without expecting to be one of the winners? If we did not expect to win there would be no point. Burns believes the answer lies in shades of grey; all too many traders go into the markets looking for the “holy grail” or the sure thing, the system either discretionary or mechanical that will continue to work no matter what. Unfortunately for those folks trading is much harder than that, there is no definitive certainty in the markets and the best we have are mere probabilities (i.e. shades of grey). In Burn's mind it is the way that we approach these probabilities as traders relative to the herd that will determine a large part of our success. So the question becomes how does one look at the markets without becoming part of the herd?

This implicit question along with Burn's analysis of the aggregate desires of trader's to be successful stimulated my thoughts about what other beliefs we take for granted in trading and how that could lead us to be more like the herd than we think.

My next post will detail my ideas for a system I am beginning to test that I think may be able to take advantage of some of the herd mentality we are seeing in specific sectors of the market these days.

Andrew



Disclosure: I have no association with either Barry Burns or tradinginterviews.com