The Bandwagon Theory: A Glimpse At How The Market Really Works

from the book Tools And Tactics For The Master Day Trader

by Oliver Velez and Greg Capra

Imagine a bandwagon that is rolling forward at a quickened pace. Music that is very pleasing to the ear is being played from speakers on each side of this bandwagon, and a few people currently on the back of the wagon are partying, having the time of their lives. The music, loud and clear, starts to attract many other onlookers that happen to be idly standing on the sidelines. These onlookers, unable to resist the sweet sounds being played, run to join the party that seems to be going on. Progressively, more and more onlookers jump on the back of this bandwagon, and those few who were initially enjoying the first phase of the party begin to leave. As the crowd of the new party animals on this bandwagon grows larger, the bandwagon finds it harder and harder to move forward at the same pace. It slows, enabling more and more late onlookers, witnessing the great fun, the chance to jump on. The crowd grows even larger. Larger and larger the crowd grows, until the bandwagon, heavily laden with the bodies of drunken party animals, can no longer move forward. Now that the bandwagon is at a complete standstill, more people jump on. And why not? At this point, joining the fun is easy. Absolutely no work is required, for individuals wanting to join the crowd no longer have to run to jump on board. But the nature of the bandwagon is to move forward. Its motionless state is unnatural, and therefore cannot last. It tried to move forward again, but can't. The crowd, piled on back, is much too large. It must free itself of the heavy burden. And it does. It quickly shifts into reverse, and jolts backward, knocking a few of the party animals off the back. The music stops. Puzzled faces from the crowd begin to emerge. Before anyone figures out what's going on, another backward jerk takes place, only this one is more violent. Another large group of people gets thrown off the back. Now, reality sets in. The fun has turned into a nightmare of epic proportions, and panic begins to run rampant. Some decide to jump to their deaths. Another thrust backwards sends an even larger group of drunken, off-balance people, hurling to the muddy ground. It doesn't stop. the jolts backward continue, each successive one more violent than the last. At this point, only a few die-hard wagon dwellers are holding on, their very lives hanging in the balance by a very thin thread. Failing to be completely free, the bandwagon angrily puts the pedal to the metal, and this final thrust backward is so vicious that its front wheels life high off the ground, momentarily suspending the wagon in a perpendicular position. The last of the hangers-on crash to the ground, broken and maimed to no end. At this point, a new group of on lookers emerge from the nearby woods. They are clean and serene. Each movement they make is deliberate and powerfully energetic, for they did not take part in the tragedy that just transpired. Or did they? A few of the dejected souls lying on the ground take a closer look, a look that reveals something very interesting. This seemingly new group is not new at all. It is the same group that was seen quietly exiting the party before it came to its violent end. An even closer examination by a few more beaten-down onlookers reveals something even more stunning. This group not only exited the party early, they were the originators of it! "My God", someone exclaims. Paralyzed, and unable to move freely, all these dejected souls can do is watch, as the masters of the game go to work, again. No sooner does the bandwagon's wheels hit the ground than this professional platoon bolts for the wagon. In a flash they are on board. Easy. The bandwagon, now free of the larger crowd, can move forward freely and gracefully, comfortably carrying the more astute group with it. Its pace quickens, and before long a smooth elegant stride is in place. After a few miles of uninterrupted movement, someone from this masterful group flips on a switch, and suddenly the loud sounds of entertaining music starts again. Someone yells, "OK everyone. Here they come. Let's do it again." Within moments, those who were the former victims of the backward crash become interested again. The music almost calling them from the grave. And once more, the never-ending cycle repeats.

Seeds of Wisdom

The analogy you just read is worth many more times the price of this book, if you grasp all that it contains. If you truly hears its message and lay hold to the hidden wisdom embedded in its metaphors, you will find yourself laying claim to a higher level of understanding and mastery. With each read, you will discover a deeper insight into the inner workings of the market. As we've stated earlier, the purpose of this book is to help you make the all-important transfer from the larger group of novices to that much smaller group, the invitations for which are very few. If you don't make the transfer, you will be nothing more than one of the many play toys for those who have. And when you can no longer entertain the gods with your willingness to play the game, they will send you on your way, broke, dejected, and depressed. Don't let this happen to you. The answers you seek are within the pages of this book. In fact, a very big clue to the whole game we call trading is contained in the bandwagon theory just explained. Why not read this again, right now? Your future may just depend on it.