Trading can also be easy to emotionally when an unexpected abrupt change in price occurs. An inexperienced trader might see a stock, currency pair, or coin performing well and imagine how much money could be made off the trade. This is known as FOMO, or the Fear of Missing Out. This phenomenon often causes trader to take action that they wouldn‘t otherwise.
FOMO often starts after a market moves in what appears to be an almost certain directional move. Being unable to wait until a pre-ordained level is reached, a trader enters early, feeling that they might miss the move and that the price will run higher. Markets are never a straight line forever. After a sharp move many will plateau, consolidate, or retrace shortly after the late entry.
This is further compounded if you use social media. Traders often get bombarded with images of big wins in the markets, while others they may be trading on are underexposed. This can give the trader the false impression that earning money is possible at any time.
Crucially, the lesson here is that not taking a trade is not the same as losing money. Even in a difficult set up, a trader who does not trade preserves their capital. When it is not clear, stick to the discipline and do not chase the market: it is not worth it.
Another way FOMO is dangerous is that it is easy for inexperienced traders to mistake a good transaction with a sure thing. When a lot of candles is soaring fast in the same direction, the chart can be fairly exciting and naturally push for an immediate entry. Nevertheless, the price movement alone does not tell us whether the current entry point is meaningful risk wise.
For example say an asset has gained strongly over a short period. An amateur enters near the peak (as this move appears powerful). If traders take profit suddenly then the market could fall back sharply leaving the trader to panic out at a losing trade. Sometimes the market then goes on to trade again, but this does not make the emotional entry decision a good one.
Another phenomenon is where a trader increases position size after having missed previous profits. This trader could be thinking “I would have entered earlier, so I need a larger position.” This can leave an account over exposed.
Another good habit is to take the misses. Markets are always offering fresh opportunities. Don‘t risk trading capital unless you are reasonably sure a new setup is a good one.
FOMO can also develop a vicious circle. The trader makes a late entry, then loses money and wants to make it back straight away. They might then make another trade without waiting for it to work out, and so on. If that trade also goes against them emotions run higher still and bigger decisions may be taken.
This behavior is sometimes linked to revenge trading. FOMO and revenge trading are obviously different emotions, but they can also feed off each other. The longing for making up a missed trade or a loss can lead traders to stick to them usual boundaries of risk.
A simple plan can ease this stress. A trader knows before beginning the trade why he is entering, where he intends to enter, where he will know he is wrong, and how much he is willing to risk. If this is not met there is no point in making the position.
Can form the basis for identifying the same FOMO setups happening again and again, tracking notes for each position as to why he entered, his state of mind prior to taking the position and if the setup was in accordance to his rules.
Another key to avoiding FOMO is knowing the difference between patience and hesitation. There is a difference between waiting it out and not trading. Patience is waiting to trade when the set-up is in place. A trader can stay in the game and not get into bogus trades.
Chances of multiple entries are also quite common after a large move. For example, a good breakout will sometimes lead to a sideways push, consolidation, or a pullback or another structured move. These setups sometimes offer a better defined risk then entry into the middle of a fast move.
Beginners should be cautious with signals from social media groups, traders and trading communities as well. A trade that looks profitable on the internet might hide the trader‘s entry, position size, losing trades and overall result. Copying of the entry without knowing the reason behind it can lead to extra risk.
In practice, if you are feeling behind, do not add to your risk. The market does not know you were late. Your trepidation is not a good reason to add size.
Good trading decisions are a result of a repeatable process, not of trying to take every move in the market.
The FOMO trap is really less about the market and more about how traders react to uncertainty. Traders cannot be everywhere, and no methodology can correctly predicting every market move. Relinquishing to this fact can help traders stay disciplined.
A novice can settle on just establishing some straightforward entry and exit rules to begin with. For example, the trader‘s approach may be to follow an identified setup and have a maximum risk per trade, a stop-loss rule and a maximum number of trades per day. In fact, it doesn‘t matter what the rules are but the idea is to eliminate emotional input.
Always take yourself away from the chart for a moment when the hearts pumping in anger or anticipation. If you are a trader and suddenly have the most fervent urge to get in because it‘s going all over the place then patience and waiting for a set condition can be invaluable.
FOMO does not go away once you figure it out. It just generally becomes easier with practice and journaling and time spent practicing consistent risk management. The real goal is NOT to take every trade. The real goal is to protect capital and make trades that fit a tested plan.
In trading, doing nothing is also a decision at times.
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