In the context of investing, the fear of missing out on investment possibilities, particularly those that are receiving a lot of attention, is referred to as FOMO.
The term "FOMO," or "fear of missing out," was first used to describe the pain that results from passing up opportunities and experiences like nights out with friends. However, the term FOMO is frequently used in the context of investment to describe how feelings like impatience or jealousy influence investors to make bad choices.
'FOMO' Definition
When there is a significant rally or investing plan that the press or other traders are talking about, FOMO, often known as the fear of missing out, can strike. Generally speaking, it denotes a trader's worry over the fact that others are profiting from an investment's price movement while they are not.
However, a retail investor or institutional trader may acquire a position before thoroughly studying it to see if it is a suitable investment out of a desire to jump on the bandwagon and profit from the trading method others are using.
How does FOMO affect trading?
A trader with FOMO is concerned about missing out on a significant trading opportunity. Fear of missing out (FOMO) is a prevalent problem in financial trading. It can impact anyone, including inexperienced traders with retail accounts and expert traders working for major organizations.
You get the sense that you missed a deal when you see a stock climb sharply and think, "I should be riding this move; I can't let this opportunity pass me by." In essence, your ability to make sound decisions is clouded by your want to participate in the price movement, which makes it challenging for you to conduct the essential research on the stock before making a transaction.
A typical cognitive bias that causes us to naturally feel that what is happening will continue into the near future is why we place trades out of FOMO. Every market moment in financial trading is distinct, and anything can happen anytime.
Trading out of FOMO demonstrates that greed and jealousy are our dominant trading emotions. We want to make the same profit as individuals already in the trade without considering the possibility that the price movement has peaked.
Unfortunately, when the market continues to go in that direction, the sensation of FOMO intensifies. The likelihood that the price may reverse or decline increases as it rises further. From experience, most trades executed under the influence of FOMO frequently result in losses that could have been avoided with a little self-control.
In today's environment, where social media makes it simple to know what other people are doing, FOMO has spread like wildfire. Analysts believe that FOMO exhibits a herd mentality, which is causing the crazy market surges in the post-pandemic age. The US stock market continues to post a streak of record highs despite the effects of the Coronavirus outbreak. With investors pouring into the market to avoid missing out, social media is causing widespread FOMO, pushing the markets even higher.
Individually, FOMO is caused by the desire to partake in the profits that other traders generate while you feel left out. However, it results in a lack of long-term perspective, a refusal to wait, excessively high expectations, and too much or too little confidence. FOMO is essentially about emotional trading, and if you don't control it, you can forget about your trading strategies and take unnecessary risks.
To successfully deal with FOMO, you must master your trade emotions, such as greed, envy, jealousy, impatience, fear, enthusiasm, and anxiety. These feelings keep you stuck in the FOMO cycle, where you purchase at the market's peak out of greed, envy, jealousy, and excitement and sell at the bottom out of fear, anxiety, and impatience. Then, when the market is soaring to its peak, you might be tempted to buy again.
What qualities make someone a FOMO trader?
For all traders, the fear of missing out is a constant opponent since it affects our decision-making on numerous levels, including entering trades too soon without confirmation and chasing trades that have already closed. One can only master FOMO in trading if they have good control over their trading psyche. Some traders, nevertheless, still struggle with their trading psyche. Many people still engage in FOMO behavior, and they typically exhibit the following traits:
Greed: A FOMO trader wants everything now. If this is how trading makes you feel, FOMO will likely be an issue for you. Consider your potential profit from a trade rather than paying attention to how to effectively execute your trades.
Herd mentality: A FOMO trader frequently enjoys acting in a way others do without fully understanding why they are doing it. Following the herd in trading might result in careless trading and negative results.
FOMO traders frequently exhibit impatience. Because they are concerned that the price might go away, they don't want to wait for the setup and instead want to make a trade immediately.
High hopes: Some traders simply have very high hopes. They trade irrationally because they want to double their accounts in months.
Lack of confidence: Some traders attempt to make up ground after a few unsuccessful deals. They engage in arbitrary deals to recoup their losses and make rapid returns. Unfortunately, they made themselves more vulnerable to failure.
Indecision: Some traders struggle with decision-making, but effective decision-making is essential to trading. A trader continuously makes choices, such as whether to initiate a trade, how big to make the position, and where to set the stop loss and profit objective. Decision-incapable people are more prone to FOMO.
Lack of a trading strategy: FOMO traders frequently lack a trading plan. They simply trade according to their mood. They believe that the price will continue to move in the same direction indefinitely while it is moving in one direction.
Lack of a long-term outlook: FOMO traders rarely take a long-term view into account when trading. If they do, they will know that thousands of new transactions are waiting for them and won't give a single deal any weight.
Choosing a winner: A FOMO trader tends to think that s/he can predict what will happen in the market next. There is a notion that the market will continue to move similarly since the trader is in it.
Some traders affected by FOMO notice the trade setups early enough but become stuck in their research, making it impossible for them to act at that time. They attempt to chase the trade even though it has moved from the correct entry level until the price eventually starts soaring in the anticipated direction.
No risk management strategy: Traders who trade out of fear of missing out rarely have a risk management strategy. Most of the time, by the time they enter the trade, the price has already gotten so stretched that it is challenging to determine where to set stop-loss order.
The elements that may cause FOMO
Although FOMO is an internal trading emotion, several things can cause a trader to experience it. The following are a few of those elements:
Increased market volatility: When there is an increase in market volatility, with the price swinging one way or the other, a trader is more prone to experience FOMO. The trader might be tempted to go in and ride the move if they notice a significant price swing in one direction.
News: Certain news can compel a trader to enter the market immediately to take advantage of a presumed opportunity to profit.
A trader can receive a tip that a certain stock is about to see a significant change, and out of fear of missing out, he might buy the stock without additional research.
Financial, social media forums: Traders can discuss their transactions on various social media platforms. You can find them on Twitter, Reddit, Facebook, Instagram, and other platforms. One could feel excluded when it appears that everyone is participating in a certain profitable trade.
A protracted winning streak An extended winning streak may get you so pumped up personally. You might start trading haphazardly because you feel unstoppable. Most likely, the market is on a trend, making nearly every trade profitable. When the market conditions change, the inescapable losses may eventually become catastrophic.
A losing streak can make you reluctant to place trades when your trade setting presents itself. You could be tempted to chase the deal later when you realize that the price is moving in the anticipated direction since you don't want to lose out on your sole successful prediction recently. In addition, you risk putting yourself in dangerous situations to recoup what you've lost.
Why you shouldn't trade with FOMO
You can see from our conversations thus far that FOMO is your true enemy as a trader. If you want to be a successful trader, you must conquer it. Of fact, there are several reasons to avoid FOMO when trading, but we'll just concentrate on these:
Setting a stop-loss order is challenging: When you enter a trade out of FOMO, likely, the price has already moved from the best entry point. Your stop loss should typically be a few pips above a significant support or resistance level. Setting your stop loss at the appropriate level would require you to take on additional risk or reduce the size of your position while you are chasing a trade that has moved. A lesser stop-loss order could cause your transaction to be terminated before the price has even moved.
Possible catastrophic losses: Because the market has already extended and may be poised for a retracement or full reversal by the time you are entering the trade, trades undertaken out of FOMO are likely to fail. Additionally, most FOMO victims are emotional traders who do not even employ stop-loss orders, putting them in danger of devastating losses.
Sloppy trading practice Even if you strike it rich and the FOMO transaction turns out to be a winner, it is still the wrong move because that success will only encourage recklessness and bad trading habits.
How to manage your FOMO when trading
Managing your FOMO is a lifelong practice you may struggle with throughout your trading career. These few suggestions can help you keep FOMO under control during trading, even if there is no easy way to mitigate the impact of emotions on trading.
The money you can afford to lose should be used: Trading with money you can't afford is crucial to avoid inducing negative trading emotions like FOMO while in the market.
There is no use in making one trade look like the end of the world because the market will always exist, and trading possibilities will always present themselves.
Know the market you're trading on: Attempt to comprehend the trading market. Perform independent analysis, including fundamental and technical analysis.
Plan and have a trading strategy: You must develop a plan for your trades, including position sizing, risk management, and trade management plans, as well as a trading strategy or possibly several methods. Be sure to follow your plan!
Explain why you decided to pursue a certain career: We often give justifications for rejecting our analysis and intending to blindly go along with the crowd. Verbalizing your criteria for taking the trade is one way to ensure that you keep to your trading strategy and plan. This pushes you to consider the motivations behind the trade: is it driven by strategy and analysis, or just by emotions?
Maintain a trading diary: You must keep a trading notebook in which you detail each trade for future reference and evaluation.
Three Strategies to Combat FOMO
Describe Your Motives for Joining a Trade
Most of the justification that drives every FOMO trade occurs inside as we come up with justifications for why we are bypassing analysis and rationality in favor of blindly going along with the crowd.
Speaking out your justifications makes you really consider what you know or believe about this deal, which will rapidly reveal whether you have a good justification for trade or are just making up reasons.
Utilize Your Indices
The rigid implementation can immediately disabuse any unduly hopeful viewpoint on your trading method's rapidly fluctuating stock price, which includes your preferred indicators.
The rosy illusion that a FOMO trade might produce can be broken if all of your reliable indicators, which you have diligently learned to employ, are screaming stop.
Ignore the voice pressuring you to jump on the bandwagon before it's too late. Instead, spend a few minutes carefully considering the deal like any other.
Take a course in online trading
The common biases and judgment errors that all traders experience can be thoroughly learned by taking online trading classes.
Your instructors will be able to provide you with a wide range of tried-and-true techniques for spotting and avoiding typical trading blunders, of which FOMO trades are the most prevalent and risky example.
You will have the knowledge and experience to quickly spot when you are approaching a trade from a poor perspective, which will allow you to quickly overcome the fear of missing out and instead get back to making profitable trades by your well-honed and time-tested trading strategies. As a result, you won't have to learn how to deal with FOMO and other similar trades the hard way.
Steps to Take
Humans naturally feel regret when they miss out on something excellent. Hearing about other investors who missed out on certain investments and made hundreds, even thousands, of percent returns over short periods is challenging. This FOMO (fear of missing out) can be really strong. But avoiding FOMO is essential to smart investing, and it complies entirely with Warren Buffett's maxim to "be frightened when others are greedy, and greedy when others are fearful."
You don't have to do anything, though. Rebalance your portfolio by adding to value stocks, international stocks, and non-correlated assets that have lagged and withdrawing profits from your high-flyers. This will prevent you from following the herd.
Cashing out to time the market is bad, but neither is following the herd and investing in the current investment fad. Adopt a long-term mindset and adhere to your investment plan. Great investors disregard the clamor and keep their eyes on the prize. Although it might not be as fun to day-trade cryptocurrency or GameStop, history teaches us that you will come ahead.
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