How much does human psychology affect the stock market, exchange traded funds (ETFs) and the financial industry as a whole?

Does human psychology affect financial markets more than we think? Apparently, collectively as a whole, people influence the financial markets with irrationality. Bill Radke for MarketPlace notes that as individuals, we can certainly behave irrationally. Get a big group together, and you’re not necessarily going to get a more rational result. [Why Strategy is Important.]

He cites the example of the proposed financial regulation. His thinking goes that if any sort of regulation is going to have flaws. The more judgement it gives to the regulators, you’d think, the more problematic it would be. [How to Create a Plan for Trend Following.]

Justin Fox, author of the book “The Myth of the Rational Market,” says that a simpler solution to trying to suss out the next financial meltdown would be to make all over-the-counter derivatives have to move on to the exchanges, we need restrictions on how much leverage, how much banks can borrow, etc.

Regardless of where you fall on the issue, the fact is that you can’t control the markets or how they handle certain events. What can you do?

In an effort to be a part of the simpler solution, as an investor, it is wise to enter into the market with a solid entrance and exit strategy and to follow a strategy, such as watching the 200-day moving average. Also, watching trends and keeping a grip on what the market is doing is important. Just don’t get caught up in what everyone else is doing. [What’s a Moving Average Got to Do With It?]

For more stories about trend following, visit our trend following category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.