Emotionally driven decisions almost always result in the wrong action at the wrong time.
However, traders who understand the underlying “why” causing the crowd to become emotional (and are on alert for the regular movements that “herding” causes) can optimize their entries and exits by acting when conditions are most favorable.
One of the components I use in my Decision Support Engine (or model) is the standard deviation band (sdb). I program my DSE to seek markets where, at some degree of a trend (weekly, daily, intraday bars), herding has taken the trend to either manic (overbought) or depressive (oversold) extremes.
Above is the daily bar chart of TLT, the tracking stock for the 20-year Treasury Bond. When the DSE model finds a trend that is so mature that price is testing the 2 sdb (olive/gold line), which controls 95% of normality, it goes on “yellow alert” for an upcoming manic extreme in the herd’s “certainty” that prices can only rise.
Then it waits for price to move to the 3 sdb (orange line), which controls 99.7% of normality, where it goes on “red alert” for an imminent manic extreme. At that point, I exit long exposure and/or use trailing sell stops to protect profits/limit losses, and/or establish short exposure.
To find out how to optimize entry/exit timing even further, click here.
