Perhaps the most dangerous move you can make while on the market is chasing after a stock performing well that day. A stock up 50% looks very tempting, and there’s always the chance that it goes even higher. The issue is, there is also the chance that it immediately drops, making you a sudden bagholder, sometimes for days and sometimes for months. Chasing a stock doesn’t often turn out well, and more often then not, results in lost money. But there are ways to protect yourself from this.
There are several ways to protect yourself from chasing a stock, the best way that I’ve found is to set rules for yourself. Rules allow you to enter the market with a clear idea of what your goals are and prevent you from blindly making moves in the market without a solid plan. You should always make rules that suit you and your trading style, but here are a list of rules that I follow to keep level headed while navigating the market:
- Know what it is that you’re buying: When seeing a stock trending up and you wish to ride the wave as well, first research the company, the reason for its surge, and how far, in your estimation, will it run. This prevents you from buying blindly into a stock without any idea of how the expected price movement will go,and you can protect yourself from buying into a stock at the end of its run.
- Set Concrete sell limits: Before even purchasing shares, figure out your sell limits. How much do you want to gain before deciding to take your profits, or on the other hand, how much are you willing to lose before you cut ties. By keeping these at the forefront of your mind, you can avoid losing profits while also avoiding losing more then you are willing to.
- Follow the rules you set for yourself: Easily said but harder to do, sticking to your rules can be a challenge if a seemingly good buying opportunity presents itself. Or if a stock has shot up higher then your original price target, and wanting to stay to see just how high it will go. Many situations may cause you to want to fomo buy, the fear of missing out, only to get caught in a bagholding situation. Always remember there are plenty of opportunities to be had on the market, but protecting your equity is the number one goal. And following your preset rules to a tee is a great way to accomplish that goal.
Again these are just rules i follow and you yourself may want to come up with entirely different rules to suit your investing style. As long as you have structure in how you invest and learn both patience and discipline, conquering the market becomes a reality for you.