What Is FOMO (Fear of Missing Out)?
FOMO Meaning
You're sitting in front of your desk staring at a bunch of green and red numbers just like any other morning. Doing your research about the markets and how it might potentially affect your trade.
Alright. Done.
Now that you've got your plan written down and what you want to trade for that day, the only thing left to do is sit down and wait for the price to come to you.
15 minutes passed, you start to feel bored. Your mice start to wander across different tabs.
Another 15 minutes passed, you start to feel restless. You start to rethink your plan and if you should change it so that you get the entry. You start to wonder if you'll ever get the price. You don't want to miss the trade, not after you've been waiting for so long.
Now 45 minutes into your trading day and you're agitated at how you couldn't keep your emotions in check again. You knew you shouldn't have hit that buy button when the price inched up just that tiny bit.
Now you're sitting there wondering if you should exit your position now or go for a ride.
You pride yourself on always setting your stop losses after your entries, so you escaped rather unscathed.
You still vowed to never do this again. But this is the third time you're saying it this week. Not sure if you'll ever fix this problem or be forever plateaued at this phase.
You tell yourself that you will never derail from your plan ever again. You're so close to getting consistent. If only you could catch yourself when you feel that urge to take the trade immediately.
Well, this is FOMO trading and how it can affect you as a trader. Is it good or bad?
So today, I'll be defining to you entirely what FOMO is and 3 ways to overcome it.
Table of Contents:
FOMO Explained with Examples
In 2013, Oxford Dictionaries Online officially added FOMO into its list of words. It is a noun that expresses the anxiety that an exciting event may be happening elsewhere.
Abbreviated from the term or slang for - Fear of missing out
Now with social media just within the distance of a few thumb taps away, the FOMO phenomenon among us has greatly magnified. Especially when some of your friends start texting you about where they are or taking an Instagram story at a party.
FOMO trading, however, is defined as a more serious thing that could greatly affect the outcome of our profitability.
Why do we feel FOMO?
The Loss Aversion bias demonstrated that humans are twice as affected by losses as they are by gains. For traders as well. That's if you still consider us as normal humans.
We can take 10 good profitable trades in a row and 1 bad trade is often what it takes for us to lose that momentum.
In simple terms, we just hate to lose out on anything and want in on everything.
Ergo, it makes sense that we would want to avoid losses altogether. In a trader's mind, if he/she is not profiting during an event where everybody else is, he/she is making losses. We somehow think that not making money equates to making losses.
FOMO triggers
We've made it quite clear that social media is one of the main causes of FOMO. However, a study also found that a missed opportunity produced the same amount of FOMO as seeing it on social media. In other words, it doesn't matter how we receive that information, we'll still feel it. Here are 3 FOMO triggers for traders.
#1. Social media
Every time we see that influencer on Instagram or Twitter posting about their gains, we think to ourselves: "That should have been me". So the next time we see a chart that looks just a tad similar to the previous one, we jump ahead. In fears of missing out on yet another opportunity.
#2. News
News could be in the form of a press release, an exposé, or even a guru alert! I can confidently say that most, if not all of us have imagined what it's like to capture a giant move after a press release. If only we were the first ones to hit that buy button.
You're not alone, I've been there before.
The truth is that you'll never be the first during these events. Whether it's companies or gurus, they'll always have their position in place before publishing the news. In other words, you've always been and always will be one step behind them.
Your FOMO is paying for their gains.
#3. Volatile markets
A volatile market is probably the worst one of all. It is when you're looking at a chart and all of a sudden, it makes a huge upside move. And then you think to yourself: "I have to get in now, if not, I'll miss this opportunity" or "This is the best price I'm going to get, it's only going higher after this."
Both of which are not true. Because there will always be another opportunity.
Emotions behind FOMO
Emotions are a huge part of trading and are what essentially moves the market. These emotions can also drive our actions in the markets. And FOMO is made up of 2 of these most influential emotions: Fear and greed.
Owing to this, many traders have migrated towards using technology (algorithms) to combat their natural tendencies and better their trading psychology.
The difference between an amateur trader versus an experienced professional is whether or not they have the capability to recognise the state of mind they're in and their emotions before placing the trade.
Fear
Fear is the counterparty of FOMO. It's when everybody is scared to put on a position because they feel like the market is going to crash all the way to the ground.
One can argue that this is the best time to put on a position if you're planning to invest for the long-term. After all, statistics have shown that over 90% of traders lose money. Hence if everybody is selling, we should be buying. And vice versa.
"Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett
Greed
The reason why FOMO exists.
There will always be more money to be made. The next level we could reach. And something better that we could have done. It's all a work in progress.
Greed comes in when we want more than what our strategy allows us.
You venture into dangerous territory when you're eager to get in before your entry signal, thinking that you would capture an even bigger move if the chart plays out accordingly.
You have to accept the fact that you'll almost never be early enough or have a big enough size on your best trades. That "could have", "would have", and "should have" are simply the triggers of a FOMO trade.
Greed begets impatience.
Greed is why FOMO exists, impatience is what causes you to take those FOMO trades.
Impatience is when you panic as soon as the price shoots upwards. This panic leads your fingers across your keyboard, entering an order that's way above your planned entry-level. All because you don't want to miss the trade.
"Money is made by sitting, not trading." - Jesse Livermore
A trader simply can't catch every fish in the sea (the market). And we certainly don't need to do so in order to be successful. There will always be cycles and opportunities in the market.
3 ways to avoid FOMO in trading
Overcoming FOMO starts with mindfulness and understanding what it actually is. Even after implementing the simple solutions to fixing the issue, it doesn't go away completely. Whenever you let your guard down, FOMO is there to greet you. If discipline is not your strong suit, let's take the probability of FOMO and squash it unreservedly. Take the decision out of your hands. Here's how.
Switch off that social media
Let me start off with the pros of social media. Social media allows you, to find other traders who have similar trading styles or are almost at the same level as you. With this network that you've built, you can then compare notes about where you think a chart is going to go.
A little back and forth discussion will often highlight to you what you've missed during your research process.
This network is invaluable if you use it correctly. However, once you're done with that, switch it off.
You don't need to hear "I got in at $X, anybody else?" or, "I think EUR/USD is going to the moon, get in now!" You also don't need to hear every single trader on that platform telling you why you should or should not go long on a currency pair.
Those types of posts or comments are only going to give you that nasty thing called FOMO. You don't need anybody to tell you what to do. Never did and never will. Why?
Because as a trader, you are responsible for your own actions and you need to make your own mistakes in order to learn. Trust yourself, those traders on Twitter don't really have the qualification anyway.
There's no shame in making mistakes if they are your mistakes. But don't pay for other traders' random comments on social media.
Don't use hotkeys
I've spent a good chunk of my trading days slamming the keys on a separate keyboard that I programmed just to send my orders in the quickest way possible. What ended up happening was that I kept going in and out of a position. Trading on emotions instead of a plan.
Whenever there's an uptick, I hit the buy button; whenever there's a downtick, I hit the sell button. As you can imagine, it was fully emotional trading. All entries were FOMO and revenge entries; all exits were impatient exits.
The result? Breakeven. Despite sitting in front of the screen for over 10 hours a day.
Don't use hotkeys. Plan your trades, down to the last decimal place allowed. Know where you want your entry, stop loss, and profit target to be. Use a limit order. Buy on the bid and sell on the ask.
Then sit tight and watch your orders get filled. If they don't, then so be it.
The idea is to put as many layers in between your decision to take that trade and actually placing it. This brief period is the time for you to reassess your plan. The longer this period is, the better the chances of you catching yourself if it really is a FOMO trade.
If you have a perfectly solid plan, there is absolutely no justification for having hotkeys. One order, which activates your stop loss and profit target once it is executed is all you'll ever need.
Build a quantitative strategy
Or better yet, an algorithm.
A quantitative strategy means that your strategy is based on the answer of "yes" or "no".
This will take all the emotions out of your trading. That's because you will have pre-determined entry and exit signals.
To illustrate, a quantitative strategy looks something like this:
If criteria X, Y, and Z are all met, I will take a $2000 position.
If only 2 criteria are met, I will take a $1000 position.
If only 1 criterion is met, I will not take a position.
Your job in the morning is only to find out whether or not those criteria are fulfilled. If your formula and rules give you the green light, you attack; if it doesn't, you save your bullets.
And make sure those itchy fingers and the monkey brain of yours don't mess with the backtested system.
On top of that, it will also give you a numerical measurement of your trades, such as win/loss ratio, Sharpe ratio, maximum drawdown, standard deviation, and profit factor. Which will in return, give you a very clear picture of whether or not your trading system works.
The notion is that following this trading system would put an end to emotional decision-making and guesswork. With no emotions means no more FOMO, no more fear, no more greed, and no more impatient entries/exits.
The pre-requisite is building the system.
JOMO - The opposite of FOMO
As you practice good trading psychology, you'll find yourself at a state called JOMO, which stands for Joy of Missing out.
It's when you don't really care about whether you're missing out or not anymore. Missing out, or not having your orders executed, to you, means that the trade wasn't good enough for you.
You want to trade less.
You want quality over quantity.
You value longevity over quick profits.
You value how you trade over the outcomes.
You understand that no one trade will make or break your career.
You understand that markets move in a cycle and that what has happened in the past will happen again in the future.
Finally, you'll come to realize that missing out is no big deal; it's liberating.
The FOMO trader is the gambler; the JOMO trader is the house.
What It Means for Retail Investors
Law of Inversion in trading - You don't have to be the smartest trader in the world to make money. Avoiding the simple mistakes is much simpler and more important.
Similar to a psychologist's approach to patients, combatting FOMO and building good trading psychology starts with us.
Overcoming FOMO doesn't happen overnight. It's a constant battle. Every single trader in the world has felt it and battled it before. Even professional traders get reminded from time to time. The difference is how much do you allow it to affect your trading.
The markets will keep going with or without us. Ergo, it is up to us to really manage ourselves!
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