The Fear of Missing out a trade, or as known as FOMO, is one among other emotional states in trading that is put on test over and over again.
Before we dive into the fear of missing out, for the purposes of this article, let’s tweak the dictionary definition just a bit.
Add “the market” after “elsewhere” and swap out “posts seen on a social media website” with “market indicators and criticism from fellow traders.”
Now we have a perfect definition for a phenomena that too many new and or inexperienced traders encounter – the fear of missing out on a great trade regardless of whether it fits into your trading plan or follows the guidelines of your risk reward ratio.
Two Branches of FOMO
We briefly touched on this idea in the article we published about fears in trading, but let’s elaborate in order to clarify a few false conceptions that new traders or inexperienced traders have when they approach trading.
Understanding FOMO is important because it’s the first step in the difficult journey to adjust your brain in order to retrain this fear.
One of the reasons that rewiring your brain to counter attack FOMO is difficult is because the fear works on two contrary emotions:
You see you your trade has more potential and you don’t want to get out of it
You see your trade retracing and eating your floating profit and you want to protect your already made profit.
These feelings put you, the trader, in a difficult situation. Should you have hope of a good break even though it will be at the expense of losing while a trade is heading towards retracement or breaking even? Or can you hold on to a trade and squeeze more potential out of it? This is the core of the conflict that creates FOMO in trading.
FOMO from Outside the Market
Another element of the fear comes when you’re on the sidelines watching the action in the market. When you’re flat and not in the market but you see opportunities upcoming, you might be compelled to hastily enter the market prematurely or enter late and miss an opportunity entirely.
Or let’s say you saw your trade coming to the level you would want to enter at but not all conditions had been met for the entry. But the missed trade showed that it would have been a slam dunk for you.
Now the scenario repeats itself but you have time to make the trade. The trade is forming with the same pre signs but they’re not perfect yet. Your FOMO kicks in and pushes you to enter prematurely this time which can cause severe drawdown sometimes stopped out by your stop loss or not entering at the right risk reward position for your trade. Acting out of fear prevented you from getting the most out of your entry.
Post Trade FOMO
On the flip side, related to the recency effect, you experienced a good trade and the rally you expected looks to be starting. You saw the confirmations but the market has moved along. You jump in late and enter your trade after the rally already started.
In this example the FOMO on a good rally will make you jump late on the trade and with that, expose you to more drawdown due to entering in the middle range of a price. When you’re in no man’s land you can suffer massive drawdown retracements and also your RRR will be very low because you have to allow a wide stop loss position in order to survive.
While it all boils down to a fear of missing a great or good trade, FOMO can be applied to just about all of the stages of trading. From FOMO on and entry to FOMO on the exit, the anxiety can be paralyzing.
Resolving the fear of missing out is something that every trader needs to work on. Mental exercises to break the fear of FOMO are crucial when it comes to self control and restraint.
The First step to tackling this problem is to understand and convince yourself that you cannot expect the perfect trade. Every time you stick to your plan and are about to trade, train yourself to not expect the trade to be perfect.
The next step is to put reasonable and realistic entry and exit points into your plan and only take these. Don’t change the points after you take a trade. If you do, it will just swap you for the next upcoming trade and all you’ll be doing is loosening your trading plan. Overtime, your whole plan and portfolio will unravel if you keep on this path.
The key to dealing with FOMO and so many other problems associated with trading, is to be fully responsible to sticking to your trading plan and only taking what you expected to take. Stick to it and don’t let retracement, fast momentum or any other event change your plan.
Even if there is a lot of chatter, never listen to any member of your trading community when they tell you you should have stayed longer. Opinions are fine when they’re productive, but there’s nothing to gain from critical hindsight. Sure it might have helped on the last trade but on the next trade it could ruin you.
Always remember – as long as you’re zeroed in on your trading plan, you’re doing the right thing.