Light and informative stories from LCG and the world of online trading.
Chasing the market – jumping in after a market has already made a substantial move in one direction or the other – is a common way traders come unstuck. It is one of those “classic trading mistakes” that professional (winning) traders religiously avoid.
A Common Scenario of Loss
Traders will sometimes wait for a market reversal – a major trend change – but then hesitate to enter the market when it happens, unsure if the trend turn is real. The market that had been trending down suddenly takes off to the upside, and in just a day or two is already up 200 or 300 points from the low. Angry with themselves for missing out, they buy into the surging market…, which then stops surging and experiences a temporary correction back to the downside 100 pips or so. The trader is stopped out for a loss before the market resumes its new overall uptrend, once again leaving them behind, thinking about the potential money that could have been made.
That is a classic “chasing the market” scenario.
Changing Losing Trading into Winning Trading
The secret to avoid chasing the market is two-fold:
Many novice traders have not yet developed sufficient faith in either their trading system or in themselves as traders. This is perfectly normal and reasonable, as it is only with continued trading experience that a trader gains confidence. Unfortunately, this lack of confidence often translates into hesitating to pull the trigger and enter the market when an opportunity arises. For example, when a market has been trending down strongly, even if a trader’s technical analysis shows clear indications of an impending market reversal, they may still be hesitant to buy, fearful of the market dropping lower and indeed fearful of being wrong.
In contrast, traders that are more professional accept the fact that any trade they enter may result in a loss – that is simply a fact of trading. They use things such as stop-loss orders to minimize any potential loss, but when their analysis of the market tells them to buy; they do not hesitate to take the risk. By being willing to accept the basic risk of trading, they rarely miss a good trading opportunity.
If an opportunity such as a major market reversal is missed, rather than chasing the market, a wiser move is to simply accept the fact that one trading opportunity was missed. Fortunately, for traders, the market continually offers new opportunities. Professional traders, just as they accept the basic risk of trading, also accept the fact that they are sometimes going to miss a good trade. Instead of chasing after what has already happened, they let it go and simply wait for the next good trading opportunity to come along.
If a trader still wishes to take advantage of what he believes may be a long-term trend, then rather than trying to get into the market when it has already run quite a distance, he or she instead waits for an inevitable correction that provides them with a reasonable entry price. For example, they may wait for a pullback in price to the 50- or 100-period moving average. That way they can get an entry price that enables them to run a stop-loss order that limits their risk, while still giving them a solid chance of being able to successfully enter and ride a long-term trend.
Chasing after a market that has already made a substantial move rarely works out well for traders. A trader can increase their odds of success by simply accepting the fact that they missed the move, or wait for a market correction to provide a reasonable entry point.
Any information provided is for educational purposes only and does not take into account your personal circumstances (for example your available funds and risk appetite). CFD trading carries a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved. You should seek independent financial advice, if you feel it is necessary or appropriate.