How do investors "chase the market"? It this a bad thing?

By Bob Schneider AAA
A:

Generally

, an investor "chases the market" when he or she enters into a highly priced position after the stock price has increased rapidly or become overpriced. An investor who exits a position after the security has lost considerable value also is said to be chasing the market. Both positions suggest that the investor chased the market by following trends unwisely. Many investors unknowingly chase the market and endure large losses as a result.

During the dotcom bubble, for example, many investors sought to profit from buying shares of internet and technology companies that were doing well. The popularity of dotcom companies eventually dropped and the investors who had chased the market were left with big losses.

Investors who chase the market typically make investment choices based on emotion rather than careful consideration of market trends using statistics and financial data. For this reason, this strategy has been widely criticized and most financial advisors warn against it

For more on this topic, read When Fear and Greed Take Over and The Madness of Crowds.

This question was answered by Bob Schneider.

RELATED FAQS

  1. What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ...
  2. What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover ...
  3. How effective are double tops in spotting a change in the overall trend?

    Learn about the double top price chart pattern, a commonly appearing indicator used to establish resistance levels and possible ...
  4. Are Doji patterns important when trading forex pairs?

    Find out why forex traders make heavy use of candlestick patterns such as the doji, which can be used as a signal of market ...
RELATED TERMS
  1. Outcome Bias

    A decision based on the outcome of previous events without regard ...
  2. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  3. Centipede Game

    An extensive-form game in game theory in which two players alternately ...
  4. Cournot Competition

    An economic model that describes an industry structure in which ...
  5. Traveler's Dilemma

    A non-zero-sum game played by two participants in which both ...
  6. Matching Pennies

    A basic game theory example that demonstrates how rational decision-makers ...

You May Also Like

Related Articles
  1. Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.
    Investing Basics

    How Advisors Can Help Clients Stomach ...

  2. Trading Strategies

    An Introduction To Price Action Trading ...

  3. Much has been said about using trend analysis to gauge the market, but what do we really know about the concept
    Charts & Patterns

    (Un)Mapping the Trend

  4. Trading Strategies

    Technical Analysis Strategies for Beginners

  5. Technical Indicators

    The Top Technical Indicators For Commodities ...

Trading Center