'Everyone is buying, should I buy too?'
'Everyone in the group is saying it’s good, should I jump in too?'
'It's dropped so much, why hasn't anyone run away? Am I too aggressive?'
If you’ve ever thought this way, congratulations, you are not alone. You’ve just fallen into one of the classic psychological traps on the path of speculative trading: herd mentality, also known as the 'herd effect'.
What is herd mentality?
It refers to the tendency of people to mimic the behavior of the majority when faced with uncertain, vague, or anxious situations, in order to gain a sense of 'security' or 'certainty'. This psychology is particularly common in the investment market. After all, not many people like to fight alone.
But have you noticed:
The tail end of a bull market is always the liveliest time, and the result is often that you buy in and get trapped;
The most people enter the market when prices are skyrocketing, while it is often 'ignored at the lows';
The so-called 'following the right crowd' is often just running alongside or even losing.
Why do we 'follow the trend'?
Information asymmetry: Not knowing what happened, just watching what others do;
Illusion of security: Everyone is buying, so I’m not the only one losing;
Fear of missing out: Afraid of being a step behind others and missing the chance to 'get rich';
Shifting responsibility: Losing money can be blamed on the 'market', 'group', or 'experts', not my own problem.
Have you noticed? Following the crowd is actually an escape from independent judgment, shifting responsibility to 'others'.
How to avoid herd mentality?
1. First ask yourself: What is the reason for this investment?
It’s not about what others say is good, but whether you have thought it through: Is there fundamental support? What is the state of the technical chart?
2. When something is 'ridiculously hot', it’s often time to stay calm.
If a certain product has 'suddenly gone viral', it often means it is already overheated. 'Trending' is not a buying signal, but a warning.
3. Set a trading plan, don’t let emotions lead you.
Have a plan for entry, stop loss, and take profit in advance, rather than making decisions on the spot.
4. Observe more and act less, don’t make decisions based on group emotions.
Especially in 'investment groups' and 'financial comment sections', emotions can easily be amplified, and judgments can easily be misled.
5. Develop a habit of recording, summarize the logic of each of your trades.
Looking back after some time, you will find which decisions were rational and which were just 'following the crowd'.
Investing is not about choosing the 'crowded path', but about choosing the 'right path'.
The market always deceives the majority; the winners in the market are never the followers, but the thinkers. Next time you think, 'Everyone is buying, should I buy a little too?', take a moment to ask yourself:
'If no one had mentioned this, would I still buy it?'