Chasing trades is a pitfall that many traders fall into, often with detrimental consequences for their portfolios. In this article, we will explore the three primary reasons traders chase trades - FOMO (Fear of Missing Out), the belief that any trade can turn into a winner, and the disregard for a well-thought-out trading plan. More importantly, we will provide actionable strategies to help traders break free from this destructive cycle.
Reason 1: FOMO (Fear of Missing Out)
FOMO is a powerful emotion that can drive traders to make impulsive decisions. It occurs when a trader sees a rapidly rising asset and fears missing out on potential gains. To stop chasing trades driven by FOMO, consider these strategies:
Stick to Your Plan: Before entering any trade, establish a clear entry and exit strategy based on your analysis and risk tolerance. Do not deviate from this plan due to FOMO-induced impulses. If you struggle to master your impulses, you will struggle with trading.
Limit Order Usage: Use limit orders instead of market orders. This ensures you enter a trade at a specific price, preventing impulsive decisions when prices spike.
Diversify: Creating a strong watchlist for the day can reduce the fear of missing out on a single trade. It spreads focus (and thus risk) across multiple assets and reduces the impact of a single asset's price movement. If you constantly find yourself watching the wrong stocks, join us in the Trader’s Thinktank where you will have access to the daily Premarket Prep Notes.
Reason 2: Thinking You Can Turn Any Trade into a Winner
Overconfidence can lead traders to believe they can turn any trade into a winner, leading them to chase losing positions. To stop this behavior, consider these strategies:
Accept Losses: Recognize that not every trade will be profitable. Embrace losses as a part of trading and use them as opportunities to learn and refine your strategy.
Set Realistic Goals: Establish clear profit and loss targets for each trade. Don't aim for unrealistic gains, and have a predetermined stop-loss level to limit potential losses.
Backtesting and Education: Thoroughly backtest your strategies and continuously educate yourself about the market. This will improve your decision-making and reduce the urge to chase unprofitable trades.
Reason 3: Disregarding Your Plan
Trading without a well-defined plan can lead to erratic and impulsive decisions. To prevent this, traders should:
Create a Trading Plan: Develop a comprehensive trading plan that includes entry and exit criteria, risk management, and position sizing. Stick to this plan religiously.
Journal Your Trades: Keep a trading journal to track every trade's performance and the reasons behind each decision. Review your journal regularly to identify and rectify deviations from your plan.
Accountability Partner: Find a trading buddy or mentor who can hold you accountable for sticking to your plan. Discuss your trades and decisions with them to gain valuable insights. This is one of the values of trading in the Trader’s Thinktank - Having accountability partners to help you improve your game.
Conclusion
Chasing trades is a destructive habit that can lead to significant losses and hinder a trader's long-term success. By addressing the three key reasons behind this behavior - FOMO, overconfidence, and disregard for a plan - traders can regain control over their trading activities. Implementing these strategies will not only help traders avoid chasing trades but also improve their overall trading performance. Remember, disciplined and well-informed trading is the path to consistent success in the markets.