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How to Avoid the Trap of Following the Crowd in Trading?

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Most people are naturally inclined to follow the crowd. It’s a survival mechanism that has served humanity well for millennia. However, when it comes to trading, following the crowd is the quickest way to fail.

This article will outline the Trap of Following the Crowd in trading mentality and why traders should avoid it. It will also include a narrative to explain the potential drawbacks of following the crowd.

Trap of following the Crowd in trading

Once upon a time, there were two traders: Ravi and Rohit. Both had a passion for finance and were eager to succeed in trading.

Ravi, however, was committed to researching and developing strategies. Contrary to this, Rohit believes that following the crowd is the safest and most effective way of trading the markets.

At first, Rohit seemed to be doing well. He followed the crowd and made decent returns. Initially, Ravi encountered some obstacles in the process of perfecting his strategy. But as time passed, Ravi’s returns began to improve while Rohit’s profits started declining.

The market became volatile, and Rohit’s once-reliable strategy of following the crowd (copying the trades of others) started to fail. Ravi’s patience and dedication helped him achieve great success with his unique approach. He managed to survive the storm, and his trading returns increased significantly.

Ultimately, Ravi’s success highlighted the importance of independent thinking in trading. In contrast, Rohit’s failure highlighted the downside of following the crowd.

The story of Ravi and Rohit explains Three key reasons Why following the Crowd in trading is the surest way to fail:

Lack of Originality: When traders only follow what others are doing, their approach isn’t original. That can cause too many people (traders) to jump into the same trade, which causes prices to go up too high. Because of this, traders who copy other’s trades might not make the profits they hope for and could even lose money.

Emotional Decision-Making: When traders follow along with everyone else, they might make choices based on emotions instead of logic. Seeing lots of people buying or selling can make traders feel like they should do the same, even if it’s not the most sensible idea. That can result in poor choices and a higher chance of getting wrong.

Susceptibility to Market Manipulation: When a large group of traders follows the same strategy, they become more open to manipulation by large institutions and sophisticated traders. These influential players can use the crowd’s predictable behaviour to shift the market in their favour, following the crowd with losses.

The solution to these traps is to create your own unique trading strategy built on careful research and deep understanding.

Creating and using your own unique trading strategy encourages you to think independently and not just follow the crowd. One way to develop such a strategy is to learn from proven experts who have successfully navigated the market.

A knowledgeable trader understands the importance of independent thinking.

They don’t follow the crowd. Instead, they do their own research and analysis to make informed decisions. This approach may require more effort and discipline than simply following the crowd, but it can lead to much greater success over the long term.

One trader who understood this concept well was W.D. Gann, a legendary stock market trader from the early 1900s.

Gann is known for his original trading strategies. He achieved incredible success by trusting his own decisions and not following the crowd.

Gann’s approach to trading was based on the idea that the financial market is not random but follows a set of natural laws and principles.

By studying these principles, Gann developed many unique trading strategies that enabled him to make accurate predictions about market movements and trade accordingly. He was so successful that he became one of the wealthiest traders of his time and is still considered a legend by traders today.

If you want to avoid the trap of following the crowd in trading, it’s essential to adopt a similar mindset to Gann’s. This means doing your own research, developing your trading strategy, and trusting your judgment. Developing this approach may take time and effort, but the rewards can be significant.

At the same time, it’s critical to remember that trading is never without risk.

Even the most successful traders experience losses from time to time. But by avoiding the crowd psychology trap and developing a sound trading strategy based on independent thinking, you can significantly increase your chances of success.

If you’re tired of being victim to the trap of following the crowd, it’s time to chart your own path to trading success.

Don’t get fooled into following the crowd. Take the path of an Independent trader by learning our unique and Original trading strategies based on WD Gann’s work.

By arming yourself with this quality of knowledge, you’ll have the confidence and skills to make informed decisions rather than following the crowd. The surest way to fail at trading is to follow the crowd, set yourself apart, and unlock a deeper understanding of the markets. – Divesh.

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About the Author

Divesh Jotwani is a Full-time trader in the Indian stock market. He has spent over 20+ years researching and discovering WD Gann's methods and applying them day in and out markets.