Group members believe group leaders more than they believe themselves.
It is well known in military circles that the best way to predict an individual effectiveness in combat is his relationship with his sergeant. A soldier who trusts his sergeant/leader will literally follow him to his death.
A trader who believes he is following a 'leader' (i.e. a Secular Bear Market trend in equities) may insist trading that trend, until his account is wiped out.
Let us introduce a friend of us, his name is Joe.
Joe is a nice guy and he's convinced that, at the moment, short-selling is the best thing to do in the Stock Market.
Joe is a bearish trader. He loves to short. In fact, he likes to call himself a 'short-seller'.
Well, Joe is convinced that equities in the Stock Market are in a Secular Bear Market (although there is absolutely no scientific way to prove that, but a lot of blogs say we are in a Bear Market Rally, and many experts says the economy is going bad, and we know the USD is in the shambles, and what about Elliott Waves? Didn't they say we are in a Grand Secular Bear Market Cycle? So, Joe thinks we must be in a Bear Market… or sort of).
Truth is, no matter what the reality is, Joe will always trust his sergeant/leader, the Bear Market trend.
People has been joining groups since the beginning of time. Especially at the origins of the human species, thousands of years ago, a group of hunters with a good leader was more likely to survive than a lone hunter. That is still true for many animal species, like wolves, lions, etc., but not necessarily for humans, in certain situations, at least.
In fact, the problem with the leader+crowd approach is this: what if the leader is wrong? What if there is no Bear Market? What if we are not in a Grand Bear Market Cycle, but in a Grand Bull Market Cycle?
Boy, that would hurt
Actually it did already… since March 2009.
When we join a group, we act like a child following a parent. But to be successful in trading we must become adults and take our own way. Successful traders are independent thinkers.They are leaders to themselves.
What successful traders have in common are 3 things:
1) a good trading system
2) sound money management rules embedded in the trading system
3) mastership of his/her own psychology (i.e. no fear, no bias, etc.)
Some may want to add this one:
4) they are cheaters
and yes, that is true as well, very often the most successful traders are actually cheaters, using insider information or all sort of tricks to make great gains (just ask some pit trader in Chicago…or shall we mention Goldman Sachs 'sniffing algos'? Don't even get us started…).
Unfortunately trading is basically like trying to rob other people while they are trying to rob you, it's hard business, so we have to accept the cheaters as a part of the game.
Concluding this post, we'd like to borrow the name of a notorious NY hardcore punk band of the 90s, to give a suggestion to all the Joes in the world:
"Kill Your Idols, Kill Your Sergeant, Kill Your Leader".
It will greatly benefit you, as a trader, to decide that you can be alone, out there, into the wild.