The herd mentality has helped humans survive since the beginning of time. But in the markets and trading exchange traded funds (ETFs), following the herd and trying to chase down returns may not be best method to maximize potential gains.
James Kostohryz for Minyanville remarks that most traders chase rallies because they are “afraid to miss out.” Kostohryz also deduces that the underlying fear of losing out may be more associated with envy toward others. [ETF Trend Following: The Alternative to the Herd.]
In risking a chance to get poorer, investors may invest in a rally so that others won’t get richer. Instead of investing based on the prospects of becoming richer, one actually doesn’t want to feel left out as others around get wealthier.
As a result of envy for others getting wealthier, fear, or an “emotionally charged action,” is triggered, which causes an investor to buy or sell in an attempt to stay as wealthy as others.
Trading based on feelings and emotion does more harm than good. It’s best to have a plan and a strategy in place. We use a simple trend following strategy, which uses the 200-day moving average as a buying and selling guide. It helps minimize the emotional impact you can have on your investments and provides a sell strategy to help protect you on the downside. [How to Follow the Trends.]
For more information on following the trends, visit our trend following category. To read more about the trend following discipline, check out The ETF Trend Following Playbook. And to try trend following for yourself, sign up for alerts to be notified when an ETF reaches a trading signal.
Max Chen contributed to this article.
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.