The fact that both the ECB rate decision and the US Non-Farm Payrolls report coincided meant that at least some markets saw a bit of volatility.
The quick movement in prices makes it easy for traders to get sucked into taking trades outside their normal plan or at prices far worse than they really should.
Even though the additional movement is likely to generate far more opportunities, somehow the fear of missing out (fomo) in trading seizes control of the trader and their subsequent decisions become rash.
A dangerous and chaotic spiraling out of control can then take over as revenge trading shows up and before you know it you can find yourself with sizable losses for the day.
This is why “Don’t chase trades” is such a vital day trading rule.
A Rush of Blood
So let me describe the sort of scenario that I’m talking about in a little more detail.
You thoroughly prepare for what you think could be an active session given the importance of several economic releases. You specifically identify a number of possible scenarios and some entry prices that are likely to give you a great opportunity to make a healthy amount of ticks. Then, you sit and you wait.
The numbers come out and the market reacts. It’s moving pretty quickly but has a good “feel” to it. The market sets up and you’re calm and collected. However, as you’re getting ready to pull the trigger, the market jumps a few ticks as several other traders take the trade ahead of you. “Fine” you think. “I’ll get in on the retest”. But the retest is just a little bit too shallow for you to get your fill. And the market starts to move nicely in the direction of the missed trade.
The trouble is that fomo now starts to take control and it’s a powerful motivator. Unfortunately it can also be powerful in blinding a trader to the reality of the actions that they’re about to take. So you pounce on the runaway beast and all of a sudden it stops.
This is when it dawns on a trader that they only managed to take the trade because the market had already started waning and the entry was very poor.
It Just Doesn’t Pay
If you ignore the day trading rule – “Don’t chase trades” – the most dangerous outcome is perhaps to be rewarded and end up with a highly profitable trade. Even if this only happens in a small proportion of trades, it’s unlikely that this will be at the forefront of your mind when those strong fomo emotions are motivating you to take the trade.
If you get these poor decisions reinforced by the occasional positive outcome, it’s unlikely that you’ll learn any of the important lessons of why you don’t chase trades. To start with the market doesn’t care where you enter, so if you get in at a much worse price than you had planned for, your price risk may have increased dramatically – where you’re wrong remains the same and so your stop has to increase in size. If your profit potential is still good and you have the flexibility to reduce the size of the trade to normalize risk, then a trade still could work. But this is all too often not the way things happen.
Apart from the added level of price risk to see if the trade will work, by getting in after the market has already made a thrust and before it’s had a chance to pull back, you’re increasing the risk that it’ll move against you and move against you fast. Bear in mind that the reason that you’ve chased the trade is that you’re becoming emotional in the first place and it’s easy to see that a sharp move against you right after you’ve entered the trade is only likely to intensify your emotions. Psychologically, chasing trades can be extremely damaging.
When they do happen to go right, the trouble is that you’ll see a decrease in the level of profit potential – remember that to all intents and purposes, the market doesn’t care where you’ve entered and is going where it wants to regardless. So if you’ve taken a trade closer to its destination, your profit potential is diminished.
Be Like a Cat
In terms of how you should approach potential trades in order to guard against chasing trades, you could do a lot worse than attempt to mimic our furry feline friends. A cat is a natural and effective hunter. It identifies its likely prey. It stalks its prey and waits for the best moment to pounce. It lets its prey come to it. Finally, in the moment of truth, it either pounces or it passes up on the opportunity and returns to its other business. If you’ve ever watched a cat stalk its prey, with absolute intent and focus only to pass at the last minute, it’s a fascinating thing.
Don’t Chase Trades
Here are a few other tips to avoid chasing the market:-
1) Try to be focused when your trades show up. If you’re able to set up audible alerts on your charting platform then do so. Avoid distractions when you are scheduled to trade and set up your trading environment to take this into account.
2) If you find that you’re often missing trade setups by a small margin, ask yourself if your entry plan needs revising or whether you might add a secondary entry plan if you miss the first chance to take a trade.
3) Ask yourself the question of whether you’re being impulsive based on fomo – awareness is the first step to remedy.
4) As part of your trade plan, you might want to consider giving yourself a finite tick tolerance for your entries so that you don’t have to get your entry price 100% spot on every single time.
The day trading rule to not chase trades is probably not one where the importance is going to be apparent every single time you trade. It is however, going to be crucial when the markets are moving quickly. Not chasing trades is a rule that might just save you a substantial number of ticks.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.