Stop Chasing Market Trends, They are Detrimental and Retrogressive
Chasing market trends is synonymous to fear or missing out commonly referred to as FOMO. Investors, both institutional and retail find themselves in the seemingly unelusive trait of chasing trends. Trends can be profitable if one gets lucky but very detrimental if the market gets an investor on the wrong side of the market. Reasons among many others that lead an investor or trader to chase a trend, include the pressure to provide market returns to clients and trying to get even after suffering losses. The pressure to give consistent market returns to clients validates the market adage that passive investing beats active investing.
Active investing mostly gets investors and traders caught up in market volatility plays, hindsight bias and the herd mentality. The three aforementioned elements of the investment world easily affect an investors market psychology hence gets him or her in dangerous decisions such as trend chasing. One of the major reasons markets rarely keep up with a trend is heterogenous investors. For instance, when a market is in a bullish trend, some investors feel the market is overpriced and it is time to take profits. While new traders get on the bullish momentum, traders who had entered their positions earlier exit. Other traders enter sell positions with the conviction that the market is overbought. These different sets of investors and traders define market behavior and explain why most trends do not last long.
Chasing the above bullish trend will get new investors burnt by deep market corrections that have the potential of wiping of their portfolios especially when overleveraged. The fact that a significant portion of traders and investors do not understand market cycles, irrational decisions in the market get them jumping on every trade, a risky trading and investment behavior. Cognitively, every market momentum is not investable hence invalidating chasing trends.
Avoid missing opportunities that align with your plan
Always know when to enter your trades and avoid chasing a market that has greatly moved away from your set point of trade entry.
Let go if you have missed an opportunity
The market moves in cycles, it has patterns and levels of efficiency that allow you to read into it. Do not rush, be patient and know there will be another opportunity.
Stick to your plan both in overperformance and underperformance
Despite market performance, stick to your plan. Just because a stock, currency pair, commodity, metal or any other financial asset has outperformed the market, it does not call for buying into it. Always know why you are getting into an investment or trade. Have a solid checklist.
It is always important to understand deep financial markets analysis, develop market experience and leverage it for your future growth. As such, we recommend you checkout our lifetime access course on Stocks and Forex Trading and Investing that will also cover more financial assets.
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