Herding
Why do markets sometimes move together because traders copy each other, and how can you spot it?
In plain words
Herding is when many traders take positions in the same direction at the same time, often by following what others appear to be doing rather than independent analysis. Prices of related assets then move together, and moves can overshoot because buying and selling feed on themselves.
Why it matters
A herding market can trend further and faster than individual analysis justifies, and reverse just as quickly when the crowd turns. Herding also concentrates risk: positions that seemed diversified prove to be one shared bet, so correlation rises exactly when it is least wanted.
In a real week: BTC, week of 24 April 2023
In the week starting 24 April 2023, BTC rose 5.95% to 29233.21, closing in the upper third of its range (74.0). Its hourly correlation with ETH was 0.96, labelled very close, yet ETH lagged by 5.52 percentage points. Funding averaged 0.0053% per 8 hours, reaching a maximum of 0.01% and a minimum of 0.0%, while volume was 0.32 of its prior 12-week average, labelled below its prior 12-week average. A -6.24% hourly move struck on Wednesday, 26 April 2023 at 19:00 UTC.
A common mistake
Treating a high correlation between two assets as proof of herding. Prices can move together for shared fundamental reasons; correlation shows sameness of direction, not its cause.