Identifying crowd behavior is important for anyone working with people on a mass scale, but no one as important as stock traders. It is well known that people will copy each other and move together in the same direction, but it is the science of identifying this crowd behavior that is very important in making money in the financial markets.
One of the first and foremost rules of identifying crowd behavior is that people will follow each other. Known as the bandwagon effect, for traders this means that if a few people begin selling a stock, driving down the price, other people will further lower the price by selling. This is known as distribution. Similarly, if several people are buying, many people will follow them. Traders that can identify these trends before they get into full swing are clearly at an advantage. This is called accumulation.
Another basic concept of crowd behavior is that a price cannot rise beyond a certain point before people simply will not buy in. In financial markets, this is called going too far or being overbought. The market will them move in the opposite direction, a process known as a correction.
These are just a few of the basic principles of identifying crowd behavior. Experienced market traders must be very aware and even wary of crowd behavior, adjusting their decisions to buy and sell according to their predictions of how many people will act. If you learn to identify and predict crowd behavior, you will be at a huge advantage in the financial world.
