Written By Katie Gomez

New traders can be seduced by the adrenaline rush and glamor of winning the game. However when emotions are high, logic goes out the door. It’s hard for new traders to not chase that trading-high. When we buy shares in a stock, all we can do is wait and watch. Then, if we see it starts to go up, we emotionally act and think we need to buy more! In actuality, that is the one thing we should avoid doing while the price is moving up. This is the premise behind “don’t chase the highs”—even though it seems like common sense, our emotions can easily sway us into doing the opposite. 

Stocks that have already experienced a significant price increase are often overvalued and may be due for a correction. Therefore, instead of buying more, afraid the price will go up, it is more likely that the price will eventually course correct and go back down. If you buy in at that peak, you may lose money if the stock price falls, but if you can wait and hold your positions, you will profit. 

Take a more measured approach, like doing your own research to identify undervalued stocks or investing in a more diversified portfolio that includes a mix of stocks, bonds, and other assets. Ultimately the key to success is having a clear investment strategy and sticking to it, not letting the enticing chase of emotional highs be enough to convince you to stray. 

Experienced and successful traders know better than to chase quick profits by following the latest trends or hype. They understand that making more informed decisions helps achieve long-term financial goals. The more you trade, you realize the highs are fleeting. And chasing them often only leads to disappointment—every high comes with harsh come-down to reality.

Why it doesn’t make sense to chase the highs

Stocks have to breathe, no matter their price or time frame. The prices will move up and down, but the key is making sure the down is making highs to jump on because there is less risk, and it just makes more sense. 

When you are up close, an adrenaline rush can cause momentary delusion leading you to jump when the rope is high, even though from far away, you could tell it was clearly the wrong time to jump back in. The same goes for trading. It’s easy to chase green candles and become paralyzed by the fear of missing out, always at risk of being distracted by new information.

What to do instead?

Keep track of the stock and set price alerts for pullbacks. For instance, if you are a swing trader, you will want to wait to pull back to the 10-day moving average on a daily chart. For day traders trading on a 15-minute time frame, you’ll want to use the 10-period moving average and wait for a higher number of candles to pull back into that moving average because you are buying the pullback (out-breath) and participating on the in-breath (price increases). That said, the hardest thing to manage as a trader, especially using real money, is learning to time the pullbacks by waiting patiently and fighting the fear of missing out.

The key takeaway here is that even when you’ve bought the pullback on that moving average, and you’re wrong, you don’t lose much $ (low risk), but when you’re right, you get a lot more from it (high reward). On the other hand, you are risking more by chasing the highs (high risk) for more shares whose price will eventually pull back (low reward).

So, stop chasing after highs, practice holding to let the markets breathe, let the prices fluctuate, and re-correct themselves before you act impulsively. If it helps, you can set price alerts and reminders for pullbacks to regain your attention when it’s time to move. As painful as it seems, you must wait for your in (as long as it takes) because the big payouts are found in those small fleeting windows. You must get comfortable practicing patience and focus in the name of long-term gains or delayed gratification, overcoming the short-term angst caused by the fear of missing out.