I’ve said it before and I’ll say it again … you should never chase trades (or alerts)!
If a setup is already playing out — and you’ve missed your entry — you must have the discipline to let it run without you.
Trust me, missing a winner is better than the alternative (holding a loser).
And this week, that’s more clear than ever as chasers are getting punished…
Think about it…
Traders piled into stocks and call options after Federal Reserve Chairman Jerome Powell’s dovish speech last week.
But if they didn’t quickly take profits, they probably lost all of their gains over the next few days.
Even worse, if they didn’t cut the trade when it started going against them, they got stuck holding the bag on a red position.
This happens all the time in the markets. And it’s why I want to make sure you’re never chasing.
Keep reading and I’ll show you how to avoid chasing while still having exposure to the best possible trading opportunities…
What is Chasing?
First of all, what is chasing?
To me, if a stock has three or four green days in a row without consolidation and you enter a long trade … that’s chasing the upside.
On the other hand, if a stock sees several days of red without a bounce and you go short … that’s chasing the downside.
Chasing volatile stocks is extremely risky, especially if the chart has already moved significantly in a particular direction.
But there’s an even more specific problem with chasing…
The Problem with Chasing
The problem with chasing is your entry into the position…
Getting a bad entry can ruin any chance of making a profit.
Worse, bad entries can lead to huge losses if you’re not extremely disciplined.
CAUTION: Remember that timing is everything. Being early (or late) on a trade is the same as being wrong.
Think about chasing from the perspective of an options trader…
One example would be buying a call option into a big spike — or a put option into a big drop — that hasn’t shown any real consolidation.
Another Factor That Leads to Chasing…
Another factor that can lead to chasing is FOMO…
If you aren’t careful, you could find yourself chasing a play because other traders are talking about the setup on social media.
In other words, it won’t be your hard work and preparation leading to the trade — it’ll be FOMO.
Chasing hyped-up plays is a recipe for disaster that you should avoid at all costs. If the masses on message boards are already excited about the trade, you’re probably too late.
So what can you do to avoid this negative exposure?
How to Avoid Chasing in This Market
Much to my dismay, I’m seeing a lot of traders chasing setups right now…
And in this market, of all markets, they shouldn’t be!
So, now that you understand what chasing is, let’s talk about how to make sure you never do it…
- Create your own strategy
Don’t worry about what other traders are doing. Focus on developing a consistent strategy — a perfect one for your personality — that you can employ over and over and over again. If a setup passes by your screens that doesn’t fit your game plan, don’t even think about trading it.
- Buy low, short high…
I know this is a bit of a cliche, but if you identify key price levels and build your trading around them, you should be able to avoid chasing the downside or the upside. Don’t buy puts when you’re near the bottom of a chart’s trading range — consider calls instead. Similarly, don’t buy calls near the top — think about going short.
- Always wait for consolidation
If you get alerted to a play that’s too far along in its pattern for you to jump in … don’t rush into the play like a newbie! Instead, add the ticker to your watchlist. Then, wait patiently for consolidation.
Final Thoughts
When I see traders losing money from following plays with no research of their own — I have to step in and say something.
And in a market as wild as this one, the problem of chasing is more apparent than ever…
So please, don’t find yourself in the unfortunate situation of bag-holding a play you shouldn’t be in at all.
Stay disciplined. Be patient with your entries. And stop worrying about what other traders are doing (90% of them fail, anyway)!
