An issue i have seen pop up quite a few times the past couple weeks has been the urge by myself and other traders around me to chase a trade. The psychology of being left behind is the driver behind the “Chase”. Here is the trade setup:
You’re left behind, the trade is running, you see offers being taken, you see panic buying, 5-10-50-200-500 lots buying on the offer.. The chart looks like a rocket ship (on a 1 min mind you).. you give in you take the next offer. *what happens next is what i have found happens 70% of the time.
BOOM someone smarter than you just dropped a market order on the bid in stock
PPS drops back, options holders get scared and hit the best bid, boom each price levels are exhausted until everyone is done puking what they bought during the rocket up
Then you see the second wave of selling come in. PUKE you sell the next best bid
Your out, pissed off and WHAT! The stock is now moving higher 5 min later.
Where was the best time to buy? Answer: On the last puke after the pullback. You bought from all the weak hands who chased. Remember For ever action there is an equal or opposite reaction. Since you bought low you are now greater positioned to capture an oversold market allowing you to still capitalize on a trade through patience and less anxiety because the trade is immediately profitable. *Immediately profitable because the market makers will snap the bid/ask back to the correct price once sellers are out.Once the weak hands realize they need to get back in they will start taking offers after you took all their options/shares. You win. Try this next time you think AIG(or anyting “in play”) is taking off to the moon, trust me your not to late. Buying the rips will always burn you, be patient. Buying the oversold dips in this market are much more rewarding. “buy low/ sell high”