Following the Herd

Písmo: A ++ A --

When everyone thinks alike, everyone is likely to be wrong. Not my words, altho I could easily second them.

These words were spoken of Mr.Neill, the father of contrary-opinion trading as we know it. He believed that the crowd, whether in politics or economics, always made its greatest mistakes at the point in history when events were about to change dramatically.

Mr.Neills studies revealed that a crowd yields to instincts which individual acting alone represses, and that people tend to follow the *herd* instinct. That people are susceptible to suggestions, to commands, to customs, to emotional motivation. That a crowd never reasons, but follows its emotions and accepts without proof what is *suggested* or *asserted*.

Applied to the commodity markets, contrary-opinion theory revealed that indeed most traders were on the wrong side of the market at the major turning points.

At market tops, the degree of bullish sentiment tended to be rampant; at the market bottoms, the bearish sentiment seemed equally rampant. At the tops it seemed that bullish traders were all holding their positions and hoping for more buyers to enter the market and push prices higher.

Conversely, at market bottoms the bears had all sold and were awaiting additional sellers to push prices even lower. But without new buyers entering a market at a top and new sellers at a bottom, prices had only one way to go — the opposite direction.

These studies have shown that at the extremes of the market, when 90% or more hold a similar attitude, the market simply MUST reverse itself. As a result, contrary-opinion traders establish positions opposite to prevailing opinion. Studies have also shown that the greater the percentage of people holding an opinion, the stronger the signal is to establish a contrary position.

Lets sum it up. Contrary-opinion traders are always looking for a one-sided market sentiment in order to take the opposite side. If you remember that the crowd is invariably wrong at the extremes in the market, you might very likely do better by taking a position opposite to the majority opinion than to follow the crowd.

Good trades,

Tom