Reasons why not to chase a stock

Knowing how to enter into a position is just as important as knowing how not to enter into one. The two most common ways of botching an entry are chasing a stock past year ideal entry point and anticipating a move to an entry point too early.

When you decide to enter into a position, refrain from chasing stock too far past your ideal entry target range. This does not mean that you cannot get into the stock; it simply means that instead of paying an immediate premium for it, you are waiting for it to pull back before getting in. You can get in on a pullback as long as the stock does not move excessively past your entry point. If it does move too far past your entry point and then falls back (a fallen star), it should be avoided.

Most market markers are unwilling to chase a stock too far past an entry range in order to execute a customer’s retail order. They prefer to short a stock to a retail buyer if the stock moves up excessively, rather than pay up for it. This is because stocks tend to pull back in a steplike fashion after moving higher.

Traders usually chase stocks because they get emotional about having missed a move, and they want in at all costs. Buying a stock you are better off letting it go. The chances are that another opportunity will materialize. Remember, missed money is better than lost money. Chasing stocks is the most common way to lose money when entering into positions.

Another common mistake made by professionals and novice traders alike is to anticipate a move into your entry zone before it gets there, with the motive of getting a cheaper price. When prices do not move to your level, there is usually a good reason. By anticipating the move, you are nullifying the reason for getting in. Always wait for the price to enter into a sweet spot before acting. Use caution and refrain from anticipation. Anticipation is a dangerous quality to possess as a trade. Regardless of how tempting it may be to get onto the wave early, when you anticipate you are projecting your will onto the market. Allow the market to open the door for you before you act. Read the market’s will and refrain from imposing your own.

The problem with anticipating a move through support or resistance is that these levels are called so for a reason. The buyers or sellers of yesterday usually fortify those levels with increased resolve. The bulls or bears may be waiting in the wings to protect their territory. The very reason you are entering into the position in the first place is because of the evidence that the selling resistance or buying support has been nullified by today’s stronger action. Anticipating a move to these levels is wishful thinking and has no basis in reality.

Next Level Trading