One of the worst habits we see new and struggling traders develop is chasing stocks. We most frequently see this when a trader is attempting to follow or get-in on some else's call or idea.
There are MANY reasons behind the psychology of WHY traders chase. I firmly believe the largest reason is FOMO – Fear Of Missing Out!
The reason chasing is such a bad habit is that many traders actually get away with it for a while. Then they start confusing luck with actually trading well. Eventually the market is going to catch on and your luck is going to run out. When this happens, we often see traders lose more money than they ever made chasing.
Understand there is a difference between chasing and giving yourself a little flexibility and wiggle room when entering a trade. It’s often difficult to get your order filled at EXACTLY the price you want, especially if you’re trading lower float stocks and/or stocks moving quickly.
What’s important is that you have parameters in place for how much wiggle room and flexibility you’re going to give your trades. Example: I give all my trades for stocks priced over $3 about $.03 worth of wiggle room. So, if my trigger price is $7.01 on a stock, I’m willing to pay anywhere between $7.01 and $7.04.
What happens if I’m a little slow or late and I can’t get in the trade under $7.05? NOTHING. I just missed the trade and I start looking for the next one.
Using the example above, what we too frequently see traders doing is paying $7.10, $7.15 or even $7.20+ for that very same stock on that very same set-up. That’s chasing! You MAY get lucky and the stock may continue to rip well above your entry price. However, all the original parameters for the trade idea (trigger, stop, risk) have been thrown out because of your entry. If your entry isn’t valid, your trade isn’t valid.
Many of you may be asking: What if I didn’t really chase and I just got a bad fill?
This happens from time to time! I have a rule for this. I immediately hit the sell button and get out of the trade! Why? Same reason I mentioned before. My trade idea/set-up isn’t valid any longer. If I wanted a stock at $7.01 and I’m filled at $7.15, all my original parameters have been thrown out. So, I get out. If that stock continues to run without me, that’s OK. I’ll get the next one.
So, how much wiggle room are you going to give your trades?
Stop chasing. No FOMO! There’s ALWAYS going to be another trade…
Any questions? Reach out!