Herding Effect - The Source of Losing Money
No matter how skilled a trader or investor may be, it is often difficult to completely escape the influence of crowd emotions. This behavior of 'going with the flow' is a reflection of human nature. However, when you choose to place your bets simply because 'most people think this way,' losses often begin from that point.
The Paradox of Investing: Feeling the Crowd vs. Independent of the Crowd
The greatest contradiction in investing is:
1. Cannot be far from the crowd: You need to understand market sentiment and feel the psychology of the masses, as market price fluctuations are often the result of crowd behavior.
2. Must also be independent of the crowd: Relying too much on crowd emotions or going with the flow can easily lead to poor decision-making, ultimately resulting in losses.
This seemingly contradictory behavior is, in essence, a great test of the psychological quality and professional ability of investors. How to gain insight into crowd behavior while maintaining independent thinking is a required course for every successful investor.
How to balance these two?
1. Analyze the market from a professional perspective
- Use data and rational logic to avoid being swayed by short-term emotional fluctuations.
- Through technical analysis or fundamental analysis, seek out real opportunities in the market instead of blindly following trends.
2. Train psychological resilience
- Learn to stay calm during market euphoria, not driven by greed; remain rational during market pessimism, not dominated by fear.
3. Form an independent trading system
- Have a clear investment framework, set entry and exit criteria, and avoid changing strategies arbitrarily due to external voices.
The Process of Cultivation: Discipline and Growth
Investing is not only a technical competition but also a psychological practice. Feeling the crowd while being independent of it, this process is akin to cultivation, requiring time, experience, and discipline. Only through continual summarization and reflection in practice can one gradually master this art and prevent the herding effect from becoming the source of losses.
The investment market is never short of opportunities; what is lacking are those investors who can persist in independent thinking and not be swept away by emotions. Rather than going with the flow, it is better to find your own direction amid the noise of the market.
