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Behind Finance: Herd Mentality in Trading
By - Dan Raju, CEO at Tradier on Jul 27, 2021 at 1:50:29 PM

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How often do you make trading decisions based largely on the hype of what other people are doing? Even experienced traders are susceptible to following the crowd more than logic at times. In the trading world, this is described as herd mentality. It is often difficult to ignore exciting, over-hyped trends, especially in a volatile market. Nonetheless, separating your logical trading decisions from your emotions is crucial to a strong trading strategy. Read on to learn how herd mentality affects both your decisions and the overall market—and how you can build resilience into your trading style.

 

What is Herd Mentality?

 

The term herd mentality refers to the tendency of people to follow what others in their group are doing, especially in response to an inciting factor like a threat or surprise. Herd mentality is a survival instinct and it isn’t always a bad one. Sometimes it helps us make productive decisions on the fly. For example, if you’re driving and notice that all the cars ahead of you are merging into another lane due to a traffic accident up ahead, most likely you will do the same and avoid having to do it at the last possible minute—aka, when you come up right on the accident and have no choice but to change lanes.

You followed herd mentality to make that decision by assuming that the cars ahead of you knew what they were doing. In this case they were right, so you were right. The “herd” doesn’t always know what they are doing, however. In fact, most people in situations driven by herd mentality aren’t acting based on their own knowledge or experience at all. Instead, they’re choosing what other people are choosing simply because others are choosing to do it.

 

How Herd Instinct Affects You as a Trader

 

Herd mentality is often strong enough to convince you that your own perceptions are flawed and that others know the way. Because of this, trends and hype can do more to validate your decisions than experience or thorough analysis.

 

The financial market involves so much risk, uncertainty, and change that it is a prime opportunity for herd mentality to thrive. While paying attention to trends and data is a necessary part of any successful trader’s strategy, herd mentality favors the trend above all else. For example, when more people start selling their shares, others assume they have a good reason to do so. This puts pressure on them to sell as well. Like a stampede, the number of people following the herd quickly multiplies—and then you have a case of panic selling.

 

How Herd Mentality Influences the Market

 

The problem with a stampede is that it can cause more harm than the original threat. Indeed, the danger may not even be real. We've seen this happen in the financial market many times. A news report of low company earnings, a failed product, or a lawsuit can trigger worries that the stock value will fall. The rumor mill starts turning, and some traders decide to sell. Before long, there is an enormous sell-off and people are left with losses they could have avoided if they had held their shares.

 

A market bubble is another result of herd mentality. Because people are eager to imitate group actions that seem beneficial, they'll hop onto the bandwagon for rising stocks. The dotcom bubble is a perfect example of this. Traders in the late 1990s were irrationally excited about newly public Internet companies. As more and more investors bought shares, the stock values skyrocketed beyond the actual earnings of those companies. Once the capital dried up, the bubble burst, and investors were left with massive losses.

 

Historic Herd Mentality Effects on the Market

 

One historic example of how herd instinct leads to bubbles is Tulipmania, which happened in 17th-century Holland. Tulips were a rare and highly valued commodity at this time. Wealthy merchants who wanted to prove their clout began purchasing tulips in insane numbers. This drove up the flowers' price to exceed even the cost of some houses! Tulip investors hoarded their wares in hopes of amassing wealth. Of course, the upward trend did not last, and tulip prices dropped to normal levels within a week leaving the investors at a significant loss.

 

A more recent example is the GameStop (GME) short squeeze. In January 2021, members of the subreddit r/WallStreetBets purchased shares of GME stock, contributing to an artificial raise in the price of GME stock. Their outcome disrupted hedge fund investors who were betting on a downward trend. This would have led to sizable profits once the value plummeted, but individual  investors一most likely following herd mentality一created a GME bubble and shifted the market significantly. Unfortunately, the trend drew a lot of investors to pour money into the stock, only to lose it when the bubble finally popped.

 

Panic sell-offs and overconfident investment bubbles have happened for centuries and will continue to happen. They are a major side effect of herd instinct in trading. In 2021, cryptocurrency markets are deeply affected by herd behavior. Between fall 2020 and spring 2021, Bitcoin's value grew 600%, but then plummeted by early summer. Crypto is an emerging and volatile market, which makes it extremely difficult to predict. So, many investors follow the crowd, which creates bubbles that pop quickly.

 

Conclusion: Always Do Your Own Research

 

The best way to avoid the negative effects of bubbles and sell-offs is to do your due diligence. When others start buying a trendy new stock or selling out of fear, think before making a transaction. Review the data. And always do your research before attempting to short-sell a stock or join in a buying craze.

Individual decision-making is always more advisable than the herd mentality. Set aside your concerns about missing out on a hot new stock. With clear investment goals, you can trade with greater clarity and confidence — and not fall sway to panic buying or selling.


Market Report Markets come roaring back
By Todd Horwitz on Jul 25, 2021 at 5:35:27 AM

Market Report: Markets come roaring back

By

 

Todd Horwitz Chief Strategist BubbaTrading.com

Be Prepared not Surprised.

When the markets closed on Friday July 16th with a big sell off at the close it brought the question, is the rally over? On Monday July 19th markets tanked early in the day taking the Dow lower by almost 1000 points. However, by Friday we saw new highs in the Dow, S+P and Nasdaq.

It appears markets are not ready to go down, we have seen Lumbar fall 70%, Housing markets slow and inflation at levels not seen for 30 years. For now, nothing matters but cheap money and chasing yield which will continue until it doesn’t.

One thing that investors and traders must recognize is despite economic warnings, inflation and other concerns markets will move in the path of least resistance. Money has no conscious and will continue to go where its treated best

The option markets continue to signal new highs should continue Call buyers lead the way closely followed by Put and Put spread sellers. The VIX continues to fall as complacency reigns. It appears that there are no concerns for the mass, the rally should continue.

Tech stocks continue to lead the way with AAPL, SQ, NVDA, TSLA and AMZN were the leaders in bullish options trades. The bears are selling SPY, AG, X, JWN and BAC. In other words, Tech and the Nasdaq lead the way.

As traders and investors, we have one thing to remember, follow the trend of the market. Be patient disciplined and leave your emotions out. The most important thing to remember is money management and self-control. 

Todd “Bubba” Horwitz

BubbaTrading.com


Mid-Year Market Trends to Watch
By - Dan Raju, CEO at Tradier on Jul 21, 2021 at 9:11:27 AM

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Despite much of the nation returning back to normal, so far 2021 has proven to be unique in its own right. Many markets have either started to rebound, or in the case of the United States, have bounced back resoundingly. Much of this rebound can be attributed to factors such as people returning to work, consumers exercising pent-up demand, and global supply chain issues being resolved. However, there are factors that may hinder these gains as well. Now that we’re halfway through the year of recovery, let’s look at what trends we may see when it comes to the market.

 

Rising Inflation 

 

Many are anticipating inflation and its accompanying side effects in the latter half of 2021. The country’s breakeven inflation rates have continued to grow higher since January and investors saw the US dollar rise 2.5% in June. Gas prices and grocery bills are predicted to stay high for the rest of the year. Inflation will be a chief issue to contend with in the second half of 2021, and investor sentiment will be largely determined by how the Federal Reserve System addresses the growing inflation with its monetary policies in the coming months.

 

Easing Investor Optimism 

 

Some argue that investor optimism will likely ease up in the second half of the year,  even when considering the outperformance and market highs at the start of the year. Earlier in 2021, government stimulus checks and pent-up consumer demand fueled US economic growth. The GameStop (GME) short squeeze in January kicked off the trend of growing interest in stock buying and selling from a broader demographic of investors. While these trends aren’t likely going away any time soon, some analysts suggest that there was an overbuying of stocks in the first half of the year that won’t continue into the second half of 2021. As with any trend, of course, only time will tell on this one. 

 

Increased Small Business Hiring

 

Market trends for the rest of this year will also be influenced by the labor market. Small businesses took a massive hit in 2020. Labor shortages that existed in certain industries, such as the construction industry, were only exacerbated by COVID-19. As corporate earnings surged in the beginning of this year, some feared that small businesses would be left in the dust. Fortunately, small businesses are experiencing their own slice of recovery. Small business hiring has skyrocketed in recent months, according to recent data from Charles Schwab, and with many state-based stimulus packages expiring soon, some are predicting that our current overall ‘labor shortage’ will ease up sooner rather than later. 

 

The State of the Supply Chain 

 

A final trend to consider that will affect markets will be the fixing of global supply chains. In 2020, many global and national suppliers simply shut down, which hurt businesses and the economy on a grand scale. Early in 2021, a six-day long blockage in the Suez Canal disrupted countless domestic and global businesses, impeding an estimated $9.6 billion worth of trade each day. Now that much of the global economy is in recovery, we can hope that a “rebalancing” occurs within the global supply chain -- which will carry a ripple of positive effects to the US markets. 

 

Ultimately, only time will tell when it comes to how the markets will evolve over the rest of 2021. Continued economic growth and market stability for the foreseeable future would certainly be a welcome trend for investors and analysts alike.


Market Report Is the Fat Lady Singing
By Todd Horwitz on Jul 17, 2021 at 2:20:23 PM

 Market Report Is the Fat Lady Singing

By

 

Todd Horwitz Chief Strategist BubbaTrading.com

Be Prepared not Surprised.

Markets had a rough week with the Dow, S+P and Nasdaq slightly lower, the Russell clobbered. One week does not make a trend but there are certainly warning signs that indicate trouble could be near.

Many traders and investors try to predict what is next which is a mistake. The charts and price action should be all that we consider, trying to trade the news is a dangerous proposition. Market direction is a cumulative total of events that eventually make markets switch directions.

Looking at the options strategies that were the most popular last week remain bullish, the top three are Call Buying, Put Selling and Put Spread selling. The bears did buy some puts either for protection or as a trade. Bear Calls and Bear Call Spreads round out the top five.

Although tech remains in charge with the top symbols being, AAPL, QQQ, AMZN and ROKU. One big change for the Bulls this week was the SPY moved to the number one most bullish. On the bear side we see no surprises with XLE, CHV on the top. Both are oil related which had its first down week in six. MSFT, WDC and IWM round out the top five.

The biggest concern here could be the price of Lumbar which has collapsed. This could indicate a slowing in the housing markets which has been on fire.

As traders and investors, we have one thing to remember, follow the trend of the market. Be patient disciplined and leave your emotions out. The most important thing to remember is money management and self-control. 

Todd “Bubba” Horwitz

BubbaTrading.com


How Trading and Psychology are Linked
By - Dan Raju, CEO at Tradier on Jul 12, 2021 at 1:26:59 PM

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When it comes to trading, psychology plays a big role in your successes and failures. Trading psychology boils down to the thoughts, impulses, and behaviors that form your decision-making. Even the most efficient and formulaic traders are able to be successful because they have trained their mental states to work in their favor rather than against them. Read on to learn what a proper trader mindset looks like and how you can gear your psychology toward reaching your goals. 

 

Trading Psychology Looks Like This 

 

Since some of the core emotions in human psychology are fear and desire, it should come as no surprise that fear and desire take center stage in trading psychology. Fear and desire play huge roles in determining how disciplined you are and how likely you are to take risks. Everyone’s disposition is different and ever-changing, but more likely than not, you can gain insight into how fear and desire rule your decisions by asking yourself questions like:

 

  • Do I often spend time carefully crafting a trading strategy only to abandon it when I see a new trend that I’m afraid to miss? 
  • Do I end up sticking to most of the strategies I set?
  • Do I lose money often based on impulse decisions? 
  • Do I over-compensate for failure and end up losing even more money in the process?

 

Why Understanding Your Mindset is Important 

 

At its core, any emotion like fear and desire is a signal that can function either as a tool for survival and success or as a hindrance to your goals. The difference in outcome depends on how you react to the emotion and utilize it. 

In a broad context, psychological training teaches you how to utilize your everyday emotions in a way that benefits you and your lifestyle. In a trading context, proper psychological training allows you to form habits and behaviors that benefit your trading game and allow you to navigate failure efficiently. So it’s important to be aware of your mindset in order to modify it and reach your goals. 

 

How Your Mind Gets in the Way of Your Goals

 

If you don’t have a good grip on how you react to fear and desire (also known as greed, impulsivity, longing, etc.) in your trading decisions, there are several outcomes that can happen:

 

You’ll Act on Emotion

 

In trading, thinking on your feet and making timely decisions are just part of the game. With that in mind, when you’re making those decisions based mostly on fear or desire, those snap decisions can end up costing you. One way your mind can trick you into making a decision is through herd mentality: this describes the tendency of an individual to join a trend simply on the basis of many other people jumping on it as well. The individual assumes that the other people jumping on the trend have done their research and analyzed the market correctly, but this usually isn’t the case. 

While you can find success in some instances of herd mentality, these moments are few and far between. Trends can invert at any time, especially when emotions are involved rather than data. There is a reason that seasoned, successful traders advise every trader to form strategies and try to stick to them on a highly consistent basis. 

 

You’ll Abandon Your Strategy (and Hard Work) 

 

As mentioned before, fear and desire can make you veer from your trading plan once you’ve spotted a new trend or piece of data that seems to contradict your current strategy. Sometimes abandoning ship is a good decision -- not every trading plan will be a successful one. However, if you find yourself doing this often, it is most likely at your detriment. The plans that you work hard to craft based on your research, experience, and tools like backtesting are most effective when they are followed how they are intended to be followed: consistently. 

 

How To Take Advantage of Your Mindset

 

As you work on your mindset, here are some things you can do to train yourself toward a more beneficial and efficient trading psyche: 

 

  • Identify your impulses. 
  • Record the times your trading outcomes are negatively impacted by impulses. 
  • Pay attention to the events that frequently trigger your buying and selling. 
  • Assess your performance regularly. 
  • Stick with your trading plans and form better ones by conducting more research and taking advantage of tools and community resources.

 

For more information on how to become an efficient trader, check out our five essential habits that seasoned traders build. Happy trading! 


Market Report Bulls No surprise, Bulls lead the way
By Todd Horwitz on Jul 11, 2021 at 2:40:53 PM

 Market Report Bulls No surprise, Bulls lead the way

By

 

Todd Horwitz Chief Strategist BubbaTrading.com

Be Prepared not Surprised.

We have been witnessing one of the easiest markets to predict in history, the bulls are in total control. Every dip finds buyers the bears have been unable to cease control. The biggest reason for the continuation of the rally is TINA, there is no alternative.

Important to remember, although direction has been easy everything else has been almost impossible. The slow drift higher keeps trading a challenge. Although the VIX had one spike last week the trend is lower, traders depend on volatility which makes trading conditions tough.

It’s with little surprise we see the top options strategies bullish, Call Buyers control the top followed by, Bull Pit Spreads, Bull puts and Bull Call spreads. There are few bear strategies in sight leading to a massive amount of complacency.

A couple of things to remember, Complacent markets usually signal the end is near and there is no such thing as a cheap option. As pundits continue to push the idea to buy “cheap” protection remember, options are fairly priced except when expensive.

Tech continues to lead the way with QQQ, AAPL and AMD on the top. SPY and IWM have snuck into the top five with earnings season beginning Tuesday. The Bears are led by GLD, GE, AG, X and NUE. This is a huge week as earnings kick off, but all signs lead to a higher market.

As traders and investors, we have one thing to remember, follow the trend of the market. Be patient disciplined and leave your emotions out. The most important thing to remember is money management and self-control. 

Todd “Bubba” Horwitz

BubbaTrading.com


Tradier Brokerage Announces a New Digital Onboarding Process for Customers of 75 Countries to Support it's Growing Global Active Trading Community and its Marketplace of API Connected Platform
By - Dan Raju, CEO at Tradier on Jul 7, 2021 at 12:14:20 AM

CHARLOTTE, NC, July 07, 2021-- Tradier Brokerage is pleased to announce the launch of its new digital international onboarding process to enable active international retail investors to get seamlessly onboarded through its online properties and API-connected platforms. Currently, over 88% of the accounts at Tradier Brokerage are based domestically. This enhancement furthers its commitment to offer commission-free access to the US markets and to the Tradier marketplace of third-party tools and content globally.

Globally active traders require actionable content, platform customization, and customer service in addition to low fees. Over the years our Traders and Platforms have requested the same digitized account opening experience we provide to our domestic clients to become available for clients across the globe. This release is expected to address such requests and empower Tradier Brokerage and our Partners to expand outside the domestic market.

"Active Equity and Options Investors both domestically and internationally who account for over 80% of the retail US-listed trading volumes today are currently lost between the hype around commission-free investing and rigid legacy brokers. They are a different segment altogether. They need enhanced technologies, deeper content, and most importantly educated support. I expect this release to empower Active Retail Investors globally to have enhanced access to the US markets and give them customizability and choice," said Dan Raju, CEO, and Co-Founder of Tradier.

About Tradier Brokerage Inc.

Tradier Brokerage, Inc.—a member of FINRA and SIPC—is an independent subsidiary of Tradier, Inc. The Brokerage API enables entrepreneurs, businesses, developers, and active traders to solve their trading and brokerage challenges using independent content and tool providers of their choice—at simple and competitive prices.

About Tradier, Inc.
Tradier, Inc. is a cloud-based financial services provider and brokerage API company that offers a groundbreaking platform to serve platform providers, advisors, developers, and individual investors. Tradier delivers an innovative set of fully hosted APIs, modules, and "out of the box" tools that are leveraged by a growing list of providers seeking to create innovative trading and investing experiences.


Market Report New Highs Roll
By Todd Horwitz on Jul 4, 2021 at 12:08:19 PM

 Market Report New Highs Roll

By

 

Todd Horwitz Chief Strategist BubbaTrading.com

Be Prepared not Surprised.

Just another week in the markets, ho hum they made new highs once again. Complacency reigns over this market, investors cannot get in fast enough. The VIX continues to fall making new lows once again.

The term being used for markets today is TINA, there is no alternative. This action is what eventually will create the problem in markets and why there is a major sell off looming. Remember we cannot time the market we can only follow the price action. For now, expect new highs to continue, especially coming into historically the most bullish time of the year.

We know that the driver of this market is the FED and cheap money allowing the very wealthy to keep charging ahead. The average investor does not get the same edge, but their portfolios are growing which brings the question is it real or just the added money supply?

What we do know is that options strategies remain bullish with long calls, bull puts, bull put spreads, bull call spreads. Obviously, the bulls are the strong hands and will probably continue to push as they run over the bears. Until something changes, we expect the new highs to continue.

Tech continues to lead and pick up strength, 9 of 10 of the top bullish symbols are tech including, QQQ, AAPL, FB, TSLA and AMD. The bears are selling SPY, XLE, COST, GDXJ and X. Based on the action there are no surprises.

As traders and investors, we have one thing to remember, follow the trend of the market. Be patient disciplined and leave your emotions out. The most important thing to remember is money management and self-control. 

Todd “Bubba” Horwitz

BubbaTrading.com


Why Trading is More Accessible Than Ever
By - Dan Raju, CEO at Tradier on Jun 29, 2021 at 4:22:46 PM

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Although the rise of retail trading may seem like an overnight phenomenon, the surge has been a couple of years in the making. Many people credit COVID-19 with the rise of retail traders, also called individual traders, and it certainly did increase participation. However, a big takeaway from today’s trading environment is that regardless of the pandemic, trading is more accessible than ever. This is due to several reasons. 

New Tools and Technologies 

The data and research tools that were once available only for traditional brokerage firms are now available for anyone to use. This puts more power in the hands of the individual trader than ever before.

In late 2019, a new trend emerged that welcomed many new, individual traders into the trading world: commission-free trading. Commission-free trading quickly became an industry standard, and shifted the way people thought about trading. 

With commission-free trading came commission-free trading apps and platforms. Today, there is a huge variety of trading platforms and mobile app offerings to choose from. Great offerings not only allow you to trade from your phone, but they also contain built-in tools that can enable you to trade more efficiently. Some of the most in-demand tools are backtesting, advanced charts, and paper trading, which enable you to test out strategies without putting any money on the line. 

More (Free) Resources 

Much of the mystery and mystique behind trading is fading due to the availability of free educational resources on the internet. These range from articles and podcasts to YouTube channels dedicated to topics like how to break into trading, the different habits that traders build, and how to utilize certain options strategies and techniques. Free resources are a great tool for people of all ages who want to learn about trading without investing too much time or money trying to make it happen all on their own. 

Stronger Communities 

Trading has also been made more accessible with the growth of online communities. These communities span social media platforms like Twitter, Discord, Slack, and Reddit.

According to Insider, Discord has over 4,000 groups dedicated to trading and investing. People in those servers discuss market trends, options and stocks they’re buying, and positions they’re taking.  

Twitter and Reddit might be the most popular social media platforms for trading communities. If you’re familiar with the GameStop short squeeze from earlier this year, you’re likely already familiar with the subreddit, r/wallstreetbets. The subreddit is infamous for its memes and dedicated members, as well as their daily discussions where members discuss their next moves and strategies. 

Forums like r/wallstreetbets are a testament to the growing shareability of stock market trends and concepts, and they’re not likely to go anywhere soon, especially given the younger generations who are now becoming interested in stocks, bitcoin, and NFTs.  

A Perfect Storm

By 2020, the online brokerage industry had already shifted toward greater accessibility for all kinds of traders and investors. The pandemic environment of COVID-19 opened the door even wider: people had more time on their hands at home to try out trading for the first time or fine-tune their portfolios. From February 2020 to February 2021, over 13 million new brokerage accounts entered the market. Spikes in trading volume became commonplace. 

According to Bloomberg Intelligence via The Wall Street Journal, individual investors accounted for an estimated 19.5% of U.S. equity trading volume in 2020. This was an increase of 4% compared to 2019 and double the amount in 2010. More and more, individual investors and traders are claiming a stake in the market.

Now that we’re coming out of the pandemic, retail trading habits have settled down a bit. However, trading (and interest in trading) remains more accessible than ever, thanks to the technology and trends that have opened it up to larger audiences. 

Explore Your Options 

For free options learning and stock market analysis, check out our YouTube channel, OptionsBrewTV. We post educational content every week, with guest appearances by financial experts, entrepreneurs, and experienced traders.

We also partnered with Bubba Trading to create a (free) six-course series all about options trading in 2021. The series covers beginner basics, strategies, and more. Check it out here



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