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If you followed the herd on gold in 2013, you'd have lost money

by , 16 September 2013

Trading psychology plays a critical role in determining your success in the markets. It's all too easy to follow the herd. Successful traders rarely run with the herd, and especially not when the herd is huge. Read on to find out why following the herd on gold this year would have lost you money…

Gold has had a torrid time in 2013, to put it mildly, explains John Burford in MoneyWeek.

Here is the chart:

When the market hit $1,800 last October, the daily sentiment index reading was a hugely loop-sided 97% bulls/3% bears reading. That was a truly huge bullish herd (over 30 bulls for every bear)!

Who would not want to go long then? After all, virtually all of the pros were very bullish. And who would be foolish or brave enough to go against these experts? Surely, they must know more than you, a lowly small trader up against the hedge funds who employ the smartest brains money can buy.

If your psychology is such that you are tempted to join the herd, then you have a problem. Many only become fully committed to a view when all the evidence is in, or when the chorus of opinion shouts only one theme.

The market rewards traders who take the opposite view of the herd

But, as usual, the market had other ideas. And a trader who understood the counter-intuitive way the market works (there is a lack of safety in numbers), would be in profit, while those that joined the herd would not be quite so happy, and feeling betrayed.

And as the bullish excess erased into the late June lows, the bullish herd transformed into its polar opposite – an equally large herd with only 3% bulls and 97% bears.

The news was so negative then, and who would not want to be short gold? It was the majority opinion – the obvious position. Many articles appeared explaining how gold was going to $1,000 or even lower.

But right on cue, the market found a low and rallied sharply as many shorts scrambled for cover as bulls were only at 3%. It was a mirror image of the $1,800 high.

The market ran out of any more bulls to convert to bears.

That is the key dynamic at work at these market tops and bottoms.

So there you have it, why following the herd on gold this year would have lost you money.

If you followed the herd on gold in 2013, you'd have lost money
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