FOMO is the shortcut for Fear Of Missing Out. It is the psychological phenomenon which is also observed in the trading world. It happens when someone takes action because of the fear he would be otherwise left behind. So this person follows the crowd without thinking too much about the effects of his doings.
Key Takeaways🔑
| →FOMO is a psychological phenomenon common in the trading world, which may drive traders to make impulsive decisions. |
| →Hindsight bias and emotional trading are key contributors to the appearance of FOMO. |
| →Having a trading plan, keeping a trading journal, and maintaining discipline can help traders deal with FOMO. |
Contents
The FOMO phenomenon in trading
Have you ever seen a trader who buys when the prices are extremely high? Or someone who decided to buy Bitcoin although it is currently at a high price and the person does not know much about cryptocurrencies? Or when someone closes the position in the most unfavourable moment?
This is FOMO in action. This happens when the market experience high volatility and the decisions have to be made rapidly. The trader feels like others are more successful and he also wishes to achieve profits.
FOMO might result in unrealistic high expectations, a lack of long-term perspective, impatience, too less or too much confidence.
What contributes to the appearance of FOMO
Hindsight bias is generally the cause of the appearance of FOMO. It means that people are paying too much attention to the things they cannot be really sure would happen. For instance, a trader can have this thought, that he could have doubled the capital in his trading account. This could be true, but he cannot be really sure this would happen even if he traded differently.
It is not the secret that emotional trading does not bring good results. But maybe you do not realise it can also trigger FOMO. Fear, anxiety, impatience, excitement or greed often cause trading that involves excessively high levels of risk and negligence of the trading plan.
External factors that might unleash FOMO
There are several external factors that can trigger FOMO although, generally speaking, this is a psychological phenomenon.
News influence the trading world. The traders can be afraid to be left behind when they hear specific news and rumours.
Social media play a great part in our lives and so the lives of the traders are flooded with successful stories, especially on Twitter. This could build the urge to be successful as well. But most often the decisions made under big pressure are not rational.
The traders are constantly looking for opportunities to open transactions. They do not want to miss even one, so they begin sometimes to act carelessly. This happens especially in the markets with high volatility.
How to deal with FOMO in trading
The fear of missing out is possible to overcome. However, it requires a lot of discipline from you. You will also have to design a good risk management strategy. What else can help in dealing with FOMO?
- Know the market. You should always carry out an analysis of the market before opening a trading position. Your trades should be based on understanding the movements of the market.
- Follow your trading plan. Built one that suits your needs and then stick to it. Enter and exit the trades according to the plan and not to your emotions.
- Write a trading journal. This is a well-known tool among beginners and professionals as well. It can significantly improve your performance. By reviewing your trades from the past you will know what mistakes to avoid in the future. You should include, among others, your trading falls, risk/reward ratio and win percentage in your journal.
- Hold on to the next opportunity. The market is in constant movements and the price changes a lot. Not every transaction can be a winner and you should wait for the next good opportunity. It will eventually come.
- Share your experience. Exchanging opinions and thoughts with other traders can overcome the feeling you are alone in all this and have a soothing effect on you. Search for professional groups and trading forums.
- Adopt JOMO instead. It means Joy Of Missing Out. It is not possible, nor healthy, to stay all the time at the computer desk following the markets. You will have to disconnect occasionally. You will have to do other things. Maybe it is something related to trading as doing some research, adjusting your trading plan, or maybe it is something completely different like going for a walk and just enjoying the day. Such an approach will help you to be more relaxed and not to feel fear of missing out.
Pros and Cons 📊
Pros 👍:
- Increased Market Engagement: FOMO can lead traders to stay informed and keep abreast of market trends and news.
- Potential Profit: Driven by FOMO, traders may seize high-risk, high-reward opportunities.
Cons 👎:
- Risk of Impulsive Decisions: FOMO can lead to impulsive trading, such as buying high and selling low, which can result in significant losses.
- Increased Stress: Constantly feeling like you’re missing out can lead to high levels of stress and anxiety.
- Lack of Strategy: FOMO-driven trading often bypasses solid trading strategies, increasing risk.
| FOMO Factor | Explanation |
|---|---|
| Hindsight Bias | Overemphasis on past mistakes or missed opportunities can fuel FOMO, leading to rash trading decisions. |
| Emotional Trading | Letting emotions like fear and excitement dominate can cause risky trading behavior influenced by FOMO. |
| Social Media Influence | Seeing others’ success stories on social media can create pressure and ignite FOMO, leading to less rational trading decisions. |
Summary
FOMO, fear of missing out, is a phenomenon known in psychology and is also present in the trading world. It influences your trading performance poorly and therefore you should work on overcoming it.
This article gives you some tips on how to deal with FOMO. Be persistent and I am sure you will achieve great results.
There is the comments section down below the site. Use it to tell us about your experience. Maybe your trading has been affected by FOMO and you can help others by telling your story? Or maybe you just need to feel a part of our community? Either way, I would be glad to hear from you.
Good luck!
FAQs 📝
- Q: What is FOMO in trading?
- A: FOMO stands for Fear Of Missing Out. It’s the feeling of anxiety or fear that you’re missing out on a profitable trading opportunity. It often leads to impulsive trading decisions.
- Q: How can I prevent FOMO in trading?
- A: You can prevent FOMO by creating and sticking to a trading plan, maintaining discipline, keeping a trading journal, and staying educated about the markets.
- Q: Is FOMO in trading always bad?
- A: While FOMO often leads to impulsive and risky decisions, it can also drive traders to stay informed and keep abreast of market trends. It’s essential to manage FOMO and not let it control your trading decisions.
- Q: How does social media influence FOMO in trading?
- A: Seeing others’ success stories on social media can create a sense of pressure or FOMO, leading to less rational trading decisions.
- Q: Can FOMO lead to financial loss?
- A: Yes, if not managed properly, FOMO can lead to impulsive decisions, such as buying high and selling low, which can result in significant financial loss.