You see a stock that has gained 500% in the last month. A strategy that has won 20 trades in a row. A trader who has made millions this year. The temptation to jump on board is overwhelming. But chasing performance is one of the most reliable ways to lose money in the markets.
What Is Performance Chasing?
Performance chasing is the tendency to buy assets, strategies, or follow traders after they have already produced impressive results. It is the belief that past performance predicts future results, despite every prospectus warning us otherwise.
The cruel irony: The best time to buy is usually when performance looks terrible. The worst time to buy is usually when performance looks amazing. Performance chasers consistently buy high and sell low.
Why We Chase Performance
Recency Bias
Our brains overweight recent information. A stock that has gone up recently feels like it will keep going up. A strategy that has been winning feels like it will keep winning. We extrapolate the recent past into the future, even though we know we should not.
Social Proof
When everyone is making money on something, it feels safe to join. We are social creatures who look to others for guidance. If the crowd is doing it, it must be right - or so our instincts tell us.
Fear of Missing Out (FOMO)
Watching others profit while you sit on the sidelines creates psychological pain. The longer a trend continues without you, the more unbearable this pain becomes. Eventually, you capitulate and buy - usually right at the top.
Survivorship Bias
You only hear about the winners. For every trader who made millions on a hot stock, hundreds lost money on the same trade. But the losers do not write books or get featured in articles. Success stories create a distorted picture of reality.
Types of Performance Chasing
Chasing Hot Stocks
Buying stocks after massive runs because "they are going higher." Meme stocks, momentum darlings, and IPO pops attract chasers who buy at inflated prices and suffer when the music stops.
The Meme Stock Example
Stock XYZ goes from $10 to $100 in a month. Social media is exploding with gain screenshots. You buy at $95, thinking it is going to $200. Within two weeks, it crashes back to $30. Your $95 entry is now worth $30 - a 68% loss - while early buyers still have profits.
Chasing Hot Strategies
Switching to whatever strategy has been working recently. This year selling premium works great, so everyone becomes premium sellers. Next year it blows up. Then everyone switches to trend following. Then that stops working.
Chasing Hot Traders
Following traders who have had recent success. But hot streaks end, and you often arrive just as the trader reverts to mean performance - or worse.
Why Performance Chasing Fails
Mean Reversion
Extreme performance tends to revert to average. What goes up eventually comes down. What outperforms eventually underperforms. This is a mathematical reality that performance chasers fight against.
You Are the Exit Liquidity
By the time performance is obvious enough to attract chasers, early investors are looking to exit. They need buyers for their shares. You are providing that liquidity, buying at the prices they want to sell at.
Changed Dynamics
Strategies that worked in certain conditions stop working when conditions change. By the time performance is visible, the conditions that created it may already be changing.
Crowding
When everyone piles into the same trade, it becomes crowded. Crowded trades have poor risk/reward because the easy money has been made and the exit doors are small.
How to Stop Chasing Performance
1. Have Your Own System
When you have a tested system you believe in, you are less tempted by shiny objects. Your system gives you something to follow instead of chasing whatever is hot.
2. Ignore Financial Media
Financial media exists to get attention, not to make you money. They highlight extreme performance because extreme performance gets clicks. Stop consuming content that triggers chasing impulses.
3. Look at Full Histories
Before chasing anything, look at the complete history, not just recent performance. How did it perform in different market conditions? What was the maximum drawdown? Full context prevents impulsive chasing.
4. Use Contrarian Thinking
When something feels like an obvious winner, ask yourself: "Who is selling to me and why?" The best opportunities often look scary, not obvious.
5. Set Rules Against Chasing
Include explicit rules in your trading plan: "I will not buy any stock that has gained more than X% in Y days." Remove the decision from emotional moments by pre-committing to rules.
The Performance Chase Cycle
Strategy works -> Traders notice -> They pile in -> Strategy gets crowded -> Performance degrades -> Original traders exit -> Chasers lose money -> Strategy becomes unpopular -> Process repeats
Track Your Chase Trades
Pro Trader Dashboard helps you identify when you are chasing versus following your system. Tag trades and see which ones came from FOMO.
What To Do Instead
- Develop your own tested strategy and stick to it
- Look for overlooked opportunities, not obvious ones
- Buy fear, sell greed - the opposite of chasing
- Focus on process, not outcomes
- Measure success over months and years, not days
Summary
Performance chasing is the tendency to buy after impressive results, driven by recency bias, social proof, FOMO, and survivorship bias. It manifests as chasing hot stocks, strategies, or traders. It fails because of mean reversion, providing exit liquidity to early investors, changed market dynamics, and crowding. Stop chasing by having your own system, ignoring financial media, looking at full histories, using contrarian thinking, and setting explicit rules. Remember: by the time something looks like an obvious winner, the easy money has already been made.
Learn more: FOMO in trading and contrarian trading strategies.