Trading and the FOMO Phenomenon
Ever get that feeling of mild to strong anxiety that you’ve missed out on something awesome? Like, for example, your friends all going on a fantastic vacation, but you can’t get the time off work? Or perhaps you’ve seen an amazing shirt at a discount price, but when you go back to the shop to get it, they’ve all gone. Social media is also responsible for these pesky twinges; doesn’t everyone seem to be having an utterly amazing fabulous life travelling the world while you’re stuck at home paying your debts? It’s a horrible feeling, right and we’ve all been there.
These feelings, in fact have now been identified in the Urban Dictionary with the acronym ‘FOMO’, or ‘Fear Of Missing Out’. It is actually defined as ‘A state of mental or emotional strain caused by the fear of missing out’ and, as a trader, you’ll more than likely be familiar.
How does FOMO affect your trading?
Well, to start with, those anxious FOMO feelings make you take bad trades, enter or exit trades too early and move stop-loss orders too soon. This is because you fear the loss so you try and break even, and reduce risk. Sound familiar? Read on…
Have you heard yourself say these phrases on more than one occasion?
Scenario 1: “I shoulda/woulda/coulda made so much money!” – hindsight is a wonderful thing and you’re likely to exclaim this when you’ve exited a trade too early, assuming you’ll prevent a loss from occurring.
Scenario 2: You exited a trade too early and now want to give it another go, telling yourself internally: “Not this time”. This FOMO will cause you to re-enter too early.
Scenario 3: “I waited so long for this trade” – you’ve waited and waited, then jumped in and it hasn’t worked. You jumped too soon because you let your FOMO get the better of you.
Scenario 4: “Just this once” – making rash decisions, following what your gut ‘feels’ the market will do and jumping right in.
Managing FOMO when trading
• Don’t be impatient! Wait for the setup and don’t get into a trade because your FOMO makes you anxious that the price will run away. • Think long term. There’ll be so many new trades coming along, don’t place so much importance on one alone. • Manage your expectations. If they are too high, you won’t be realistic and will take risks. • Set and understand your timeframe, and how many trades per day or per week you can realistically expect to do. • Set yourself filters, rules and a trading system for risk and trade management, entries, exits, stop-losses and target setting. • Manage your confidence: those on a winning streak and are over-confident risk taking too large positions and random trades. • Read your charts! Only make entry and exit decisions when a bar is fully closed – emotions like FOMO drive mid-bar decisions. • Finally, treat yourself with respect and don’t make excuses when you lose a trade. This is known as ‘Cognitive Dissonance’ and is another psychological state that can lead us down the wrong path when trading.