In the fast changing world of trading where markets change and opportunities appear and disappear in a split second, traders often struggle with a powerful psychological phenomenon called FOMO, or the Fear of Missing Out.
Dealing with FOMO is a very useful skill for traders. Not only can FOMO lead traders astray but it can also cloud judgment and obscure logic which is not good when it comes to trading decisions.
FOMO is so prevalent today that 69% of youngsters are affected by it. The very thing an investor is trying to avoid – missing out – is caused by the FOMO paradox. The phenomenon has increased with the advent of social media which makes it easier for us to know what others are going through every second.
So how do you manage FOMO while day trading stocks? Read on!
Understanding FOMO in Trading
FOMO, or the Fear of Missing Out, is a psychological phenomenon common in the trading industry. It is characterized by an overpowering dread that missing out on potential lucrative trade will lead to lost opportunities.
The fear frequently takes the form of a strong desire to follow the most recent market trends, even if they conflict with one’s risk tolerance, overall trading goals, or trading strategy.
FOMO can result in impulsive decisions that might be expensive when it comes to Forex trading. For example, you can feel pressured to trade a currency pair that is seeing significant movement even if you have a sound trading plan or have done your research.
FOMO is experienced by many traders during their trading careers. It can affect anyone, from experienced day traders to new traders with retail accounts. This fear can result in excessive buying and selling that can eventually lead traders to enter trade very late in an attempt to chase a win. Besides, most trades executed out of FOMO frequently end up losers.
What are the Factors that Trigger FOMO Trading?
FOMO in trading does not occur without triggers. In fact, it has deep-seated emotional roots that stem from our intertwined daily lives. Understanding what emotion makes you all wind up when trading can get you one step closer to overcoming FOMO. The following are some of the factors behind triggering these emotions:
News and Rumors
News is one of the biggest causes of FOMO in trading. It can make traders prefer entering trades simply because they do not want to miss out on trading opportunities. While it is a great way to keep up with the current news, this should not be the only primary factor in your trading choices. News and rumors can magnify the feeling of missing out, as traders can feel left out.
Volatile Markets
FOMO is not limited to bullish markets where traders want to ride on the trend. They are also susceptible to getting afflicted by FOMO when there is a rise in market volatility, where price moves in one direction or another. The trader may want to hop on the bandwagon and ride the movement when they see a large price movement in one direction.
A Long Winning Streak
Observing someone else’s extended winning streak can also induce investors to make a trade out of FOMO. Investor confidence is often boosted by witnessing others’ winning trades, possibly on a specific trade. Most traders think it’s okay since everyone else is investing in it. Sadly, winning runs do not continue indefinitely. Thus, if you don’t conduct your research before buying any stocks, you can invest in them at the wrong time.
Social Media
Lastly, social media, especially Financial Twitter, can have detrimental effects on a FOMO trader. With so many news and research influencers on social media, falling prey to the latest trend is easy. A stock that is gaining a lot of attention may be worth a second look, but it is not right to base your investment on the buzz. Rather, buy a stock only after doing extensive and rigorous research. Social media should not be used as a definitive planning tool; instead, it should be used as a source of inspiration.
Other external factors, which can trigger the development of FOMO trading are:
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Raised Expectations: Some traders have overly high expectations. They desire to double their trading accounts in a few months; hence they trade unreasonably.
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Too Little Confidence: A FOMO trader usually has a lack of confidence in their own analysis and trading judgments, frequently because of insufficient knowledge. So, they end up ignoring their trading plans and opt for taking too much risk.
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No Long-term Perspective: FOMO frequently stems from short-term thinking. The FOMO on an instant opportunity can overshadow the advantages of long-term planning.
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Impatience: Individuals who are unable to wait patiently are more vulnerable to FOMO in trading because they want to accomplish everything at once.
Dangers of FOMO Trading
FOMO can be the worst enemy of a trader. It can be harmful to your trading success if you are unable to cope with FOMO. While there are a number of reasons to avoid FOMO in day trading, here we shall focus on the following three dangers and pitfalls:
Increased Risk Exposure
When a trader experiences fear of missing out on something, they might chase a market movement, thus increasing risk and losses. They might allocate more capital to one trade or overleverage their positions, jeopardizing their whole trading capital.
Loss of Money
FOMO-driven trading is usually characterized by emotional and impulsive decisions. FOMO traders frequently act on impulse without carefully considering or planning their decision-making process. Their discipline and trading approach may fail as a result of this impulsivity, leading to inevitable losses.
Emotional Turmoil
The emotional health of traders can be severely impacted by FOMO. Traders who give in to their FOMO often suffer from anxiety, tension, and disappointment. These feelings may get more intense when a trade doesn’t work out as planned, which may cause hasty judgments and additional losses.
Here are a few instances of how FOMO in trading can result in poor trading choices:
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When a trader notices that a currency pair is rising, they choose to trade it even if they have no idea why it is increasing.
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A trader may trade a currency pair when they notice that other traders are earning significant profits on it, even if does not match their trading plan.
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A trader feels compelled to trade a currency pair even if they are uncomfortable with the trade.
How to Overcome FOMO in Trading
Overcoming FOMO is not an overnight task, so do not feel disheartened. It is an ongoing process of modifying one’s cognitive processes. You may fight with it throughout your trading career, however, it gets simpler with time.
The importance of disciplined trading and risk management is one of the prerequisites to avoid FOMO. It may be helpful to keep in mind that everyone experiences it, even the most seasoned traders fall prey to it. Here are some essential tips to keep FOMO trading under control and become a successful trader.
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Develop a Trading Plan and Stick to It: A well-planned trading strategy is the cornerstone of profitable trading. Adhering to it helps you stay focused on your trading goals and prevents you from making emotional decisions, no matter how tempting it could be to deviate. You may avoid impulsive trading by adhering to a consistent set of rules and principles, which will help you stay on course.
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Understand there are Trades Every Other Day: The stock market is huge, offering a wide range of names for you to research and trade. All you must have is a trading technique. Your chances of finding a winner rise when you enter trades consistently. Even if you happen to miss one today, remember that there will be another chart setting tomorrow. In order to avoid missing out on the next great trade, learn to accept losing deals promptly.
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Don’t Spend Too Much Time on Social Media: FOMO can flourish on social media. While it can be advantageous for traders, it can also be harmful since it can be easy to get disillusioned and demotivated when it appears that everyone else is making profitable deals. Restrict the amount of time you spend with it, particularly during market hours.
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Stay Focused and Disciplined: Being disciplined and mindful is essential to avoiding FOMO in trading. First and foremost, you must realize that there are no fast routes to success. It usually takes time to achieve anything worthwhile. As a result, it’s critical to cultivate discipline and maintain focus. When you are focused and disciplined, you eventually succeed in trading as well as all other areas of life.
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Trade with a Sound Risk Management Plan: It is very important to manage risk effectively. This entails diversifying your portfolio, employing stop-loss orders, and establishing sensible position sizes. You may minimize possible losses and lessen your fear of missing out by practicing proper risk management since you’ll have a safety net in place.
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Keep a Trading Journal: Documenting a trading journal can help you in avoiding FOMO. It makes you more disciplined while making trading choices. You record everything in it for future reference. When you consistently refer to it, the chances of making trading mistakes significantly reduce.
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Be Reasonable in What You Hope to Achieve: It is not feasible to be present for everything that occurs in the world. Avoid criticizing yourself for missing out on anything; rather, set reasonable expectations for yourself.
Some additional tips to remember are:
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FOMO is a common feeling. It happens to everyone from time to time. The secret is to resist letting it dictate how you trade.
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Patience is crucial in day trading. Never expect to become wealthy quickly. Take your time and gradually increase your knowledge and abilities.
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It is necessary to study the market that you are interested in trading. This will help you better understand if the buzz and hype of a specific stock is worthwhile. So instead of performing FOMO-driven trading, do proper analysis to make better decisions.
Conclusion
FOMO in trading is a reality of life. On the one hand, FOMO can spur people to take action or emphasize the need to examine their mistakes and the causes behind missed chances. On the other hand, traders usually resort to self-loathing and blindly mimic the behavior of others. Avoid looking around. The only outcome that matters is yours. Try to better yourself instead of comparing yourself to other people.