Have you ever bought a stock and then instantly regretted it? Was that regret further confirmed when the trade showed an immediate red while sinking faster and faster? Well, you’re not alone. One of the most prominent emotional errors traders make is chasing, which manifests from a Fear of Missing Out (or FOMO.)
Life of a Chaser
Chasing occurs when a trader anticipates a pop in a stock but misses the initial move. Now the stock is way up. But instead of waiting for a secondary setup the trader just jumps on in. This impulse is from a false belief that the stock is headed to the moon without looking back. But it doesn’t. The stock is exhausted and needs to pullback. As the stock falls deeper, the pain in the pit of the trader's stomach begins to grow until he can no longer take it. He exits for a loss.
But wait, it’s not over.
The stock was just undergoing a natural rest. The secondary move is setting up and the stock suddenly pops again. Once again the trader sees the move, but is now reeling from the sting of the previous loss. So he hesitates. It’s not until he sees the pop that his optimism overcomes the pain and he jumps in again, for another chase. The vicious cycle repeats. After a few of these, the pain becomes so great that the trader walks away in disgust only to miss the real move when it finally happens. He's drained his mental capital.
We’ve all seen this happen. Heck, we’ve been there ourselves.
See a FOMO chaser’s biggest danger is preventing himself from being in the correct psychological mindset from the beginning of the trade. The best trades happen when we are in the money from the start. This can only be done if we time the trade correctly. By timing our entries perfectly, we immediately see green in our trade. By being in profit, we know we are right in our trade’s analysis and we manage the remainder of our trade with confidence. Each successive pullback is met with less fear and each target is awaited with more patience.
Of course, it’s impossible to immediately be green every single time even with well timed entries. But more often than not, we will be in the correct psychological mind frame to manage our trades.
Miss a trade? Just pass. Wait for the next trade whether it takes hours, days, or weeks. By being patient for the right setup and consistently timing the entries, we can almost guarantee success in the long run.