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Various statistics have time and again emerged indicating the shockingly low numbers of profitable traders. Although factors such as getting into the zone, not setting stop losses, or not letting your profits run have been amply discussed in the past, I would like to focus more on some reasons that are rooted in the way that our minds as human beings have been wired by nature. Firstly, as a person it very important to have an “identity,” which manifests itself via the biases one has in different matters. Secondly, to a certain extent we have all been wired to do and be what society expects. In general, one does not deviate too far from the norm for the fear of becoming an “outcast”, yet should one not have an “identity” or strong preferences or views, one is usually regarded as having self-esteem issues. As we will explore in a moment, these exact “negative” traits actually come in quite handy just before having to pull the trigger on a trade. When a news event causes a run in prices, it is human to judge the information either as positive or negative and then join the crowd if they are trading in that direction. Firstly, you act out your “identity” in that you make a decision on the information, and secondly you feel comfortable with the trade because if everybody else thinks this way it must be right. As novice traders have most probably noticed, this often results in getting whipsawed. Most often, these experiences prompt the trader to go down the path of “learning” more. However, learning more is not necessarily what will solve the problem, instead second-guessing your decision might be more beneficial. By second-guessing yourself and losing your “identity” for the duration that it takes to analyse the situation, you automatically do two things: open yourself to the possibility of going against the crowd for a much favorable risk/reward ratio and, secondly, perform a critical analysis to see the situation from both the perspectives of both a buyer and a seller. This allows you to quickly identify the balance of risks and come to a well-reasoned conclusion. Should the traders on the opposite side of the coin also have some solid reasons for taking action, you might want to choose to go against the herd; conversely, should traders on the opposite side have weak justification for their position, then the move is most likely to be sustainable and you will do better by joining the herd. For many years, I thought that when analysing a situation and I was unable to decide promptly on a bullish or bearish approach that I needed to “learn” more to actually be able to choose a side decisively; it took a long time to come to the realisation that these situations, in which I found myself in an infinite second-guessing loop, are actually the situations in which the market exhibits extreme volatility and that are usually best avoided. In a nutshell, the benefit of going with the crowd in a certain direction depends more on whether there are risk factors present or not from the opposite side than it has to do with the “strength” of the information that has just been released. Rene Riedel is a professional financial speculator and founder of Pulse Research, an independent macro-level fundamentals research and analysis company, geared specifically towards forex, bond, stock indices and commodities traders who are utilising technical analysis and are seeking an additional edge in their trading.
