What Is Chasing the Market?

Chasing the market refers to entering or exiting an investment with the intention of profiting from an occurring development or trend. Chasing the market is synonymous with herd instinct and generally involves buying in at a high price, or selling at a low price after a sell-off.

Key Takeaways

  • Chasing the market refers to entering or exiting an investment with the intention of profiting from an occurring trend that's already been pursued by other investors.
  • Chasing the market is generally used in a negative context to refer to an investor or trader who has come into a position too late to properly benefit.
  • Retail investors are often better off taking a long-term investing approach rather than chasing the market and attempting to capture gains on short-term trends.

Understanding Chasing the Market

The evolution of efficient market theory suggests that the financial markets are extremely efficient, with new factors influencing price often integrated into valuations in real-time. If the markets are truly efficient, then there is no point in chasing the market.

There are several types of trading strategies, such as momentum trading, that experience success in chasing market trends. However, in the main, chasing the market is generally used in a negative context to refer to an investor or trader who has come into a position too late to properly benefit.

Chasing the market is a concept that is derived from standard investing motivation. Investors and traders chasing the market seek to invest in new developments and trends that can be profitable for their portfolio. The problem is that market trading mechanisms and the efficiency of the market make it challenging for investors using chase-the-market strategies to identify substantial gains.

For these reasons, chasing the market is typically a futile endeavor, unless investors have large amounts of capital for investment so that small percentage gains can actually be significant in terms of the total dollar profit realized. This gives institutional investors an advantage as they trade with funds from large pooled portfolio investments. For retail investors, the efficiency of the market’s pricing of securities makes chasing short-term profits less attractive than investing with standard long-term goals.

Pros and Cons of Chasing the Market

Chasing-the-market strategies can be profitable for investors with large amounts of capital. Generally, such strategies can be important when new developments and trends present profitable opportunities or new twists to an investor’s current holdings.

While markets are generally considered to be efficient both in valuation and market trading mechanisms, following new developments in the markets overall is what keeps prices fluid and creates profit in both the short and long term. Waiting too long to chase trends that have already been well established and priced into valuations is where investors may find trouble. Investing based heavily on market chasing emotion rather than careful analysis can also be problematic and unprofitable on the whole.

In many instances, short-term chasing the market strategies are what drive efficiency and create profit opportunities. Institutional investors place a high volume of trades for actively managed investment portfolios based on daily, short-term, intermediate-term, and long-term valuation trends and developments. This gives them a significant market-moving advantage and also facilitates efficient pricing from smart money investments.

Since there are always anomalies, there can be scenarios where all types of investors may have the opportunity to profit from chasing a market trend. These situations are typically few and far between, but they do occur. Examples would include scenarios such as the dotcom bubble, where internet stocks trended significantly higher for a prolonged period of time, allowing investors with timely trades to chase market profits and exit with big gains before the bubble burst.