Herd Instinct – Results of a Personal Poll

For about a month, during my rounds of Jakarta, Penang, Kuala Lumpur and here in Singapore, I have been taking a poll on what people are and have been trading as well as their results after periods of a year and more. The unofficial results did not surprise me but what was noticeable was the power of herd instinct and the lack of common sense in such instances.

What I would do is ask my crowd to raise their hands if they were trading equities, currencies, options, futures and any other derivative(s). Each time, the number of people trading currencies outweighed the nearest rival, which in most cases was equities and/or options. Futures had the smallest return and other derivatives accounted for slightly more numbers than futures.

Second part of my poll was to get a return on the number of people trading a specific instrument profitably. What I would do is ask those with raised hands for, in this case, currencies, to keep their hands up if they were making money from it. I would repeat the process for equities, options and so on. And each time, after getting the most hands raised for currencies, I also got the least hands raised for profitability. Equities had the most profitable traders for those trading more than two years while futures had the most hands up for profitable traders altogether. Other derivatives came in lowest and options were second last.

It didn’t surprise me that currencies had the most traders because most of the ads in the papers these days are for Forex Trading workshops. This was the case about four to seven years ago when options was the craze – ads for Options Trading flooded the papers then – and from my personal experience, I have little doubt that the winning population then was also a low return.

This is not about courses or workshops. This is about how influential herd instinct becomes that it throws all common sense out the window. At each of these polls, after revealing that currencies had the most traders with the lowest percentage of winners, why then, did so many of these losing traders still persist with trading an instrument that wasn’t making them money?

Just as it was four to seven years ago, it was perceived that options was easy and dozens flocked to trade it only to find out that options is the most difficult instrument to learn and apply successfully. Yet they persisted, believing that they would achieve success in spite of the obvious difficulties.

Today, everyone seems to think that forex is easy and are flocking to it in droves. The low percentage of winners bears testimony to a repeating pattern …

… it is so easy for a skillful and experienced predator to make his kill when the herd is larger, more ignorant and heavily populated with weak prey.

The reason, in my opinion, why futures traders were fewer and bore a higher percentage of winners than any other instrument is because these traders have found a niche in an instrument that takes a lot of practice and experience. Futures traders know the dangers of this instrument and trade it well because of this fear of the dangers that lurk at every dip and rally. If is not the easiest instrument to learn, practice and trade well. Therefore those that do are a bunch of highly dedicated and serious traders who have run the gauntlet and survived it to make it their mainstay. Plus, it is one of the most expensive trades in the market and not everyone can afford to trade it.

The same can be said for equity traders. These traders make up the second highest population of profitable traders. But the reasons for this high success rate are very different. Most of these profitable traders are those who have persisted in it for more than 1.5 years. Even through a bearish year like last year, these traders have run down and up with the market, survived and prospered from it. Some applied a ‘buy-and-hold” attitude that in the long run, always is a profitable strategy. But we’re talking about the few who have the holding power, the extra ton of cash to stomach the test of time that is equity trading.

Not many have such deep pockets, dedication, discipline and patience. So these lesser endowed masses flock to the next best instrument that will allow them to trade for “big bucks” with little outlay and on huge margin – Forex. Years ago, the same dream was sold about options – low risk, high leverage and affordable trades.

It is this sort of attractiveness that drives the flocks to such instruments. These flocks are often not serious traders (in most cases, they’re gamblers looking for the quick buck with little outlay) looking for the ‘Holy Grail’ that will get them rich quick. And it is these traders that get preyed on by experienced predators as their ignorance, greed and lack of discipline overpopulate the instrument. Forex, like options before it, becomes the killing fields for many a newbie.

But they persist. They pump more money into it insisting that it can be done. They give it one more go. They tell themselves that they’ve learnt their lessons and are now smarter and better prepared for a new run at the gauntlet. All I see is more ignorance coming back with more money for the taking.

The very fine line that makes the difference between a trader and a gambler is that the gambler never knows when to quit.

Equity trading may be unglamorous, slow and reaps only small profits for the small time trader. But it is responsible for many a profitable trader when compared to forex. Futures is a highly specialized skill and only the most passionate traders can make this instrument profitable.

Forex is no different. It is a highly specialized skill that will turn any serious trader into a profitable one but only if that trader has the proper guidance, psychology and discipline. I know many profitable forex traders but they are the few skillful and experienced predators who will hate me for posting this article.

Sadly, good guidance is hard to come by these days and it is difficult to know who really provides good, quality education until you have taken the course. Another way to do this is to read up on the best books and internet sites. Problem is, good books and sites are hard to come by and it is difficult to know which books and sites provide good, quality education until you have taken the trade to the market … by which time, it’s too late to regret.

Here’s a little sound advice; if it is not making money for you, move on … stay away from the crowds and don’t do what everybody else is doing. The larger the herd, the more predators there will be.

The most profitable instrument for you is the one you can trade well everyday, using the same underlying and applying a simple set of techniques that doesn’t require paralysis of analysis. It is the same ticker symbol you look at everyday and know better than your closest partner. It is the one constant in your life regardless of the market direction. It is this underlying ticker that will make you rich, whether in a short time or a longer time, depending on your leverage, gearing and discipline.

This is the secret to a trader’s success. This is what gives a good trader his/her edge. This is exactly what makes the trader become the predator.

And the predator’s fodder?

Just look over your shoulders if you are running with a herd.

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Hi Conrad,

Thanks for a very good insight. I agree that trading is a hard and serious work like other business, where consistent learn and practice is essential; otherwise it’s a gambling.
Also thanks for the sharing, hands-on guidance and the live trade during the last booster in Jakarta. What a worth night…

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