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The Fear of Missing out on a trade, or as known as FOMO in trading, is one among other emotional states in trading that are put on the 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 of FOMO just a bit:
Now we have a perfect definition for a phenomenon 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.
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 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 your trade has more potential and you don’t want to get out of it -or- 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 trade is heading towards retracement or breaking even? Or can you hold on to trade and squeeze more potential out of it? This is the core of the conflict that creates FOMO in trading.
Another element of 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 it 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.
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 are crucial when it comes to self-control and restraint.
Here are several ways to help you cope with FOMO:
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 in your plan and only take these. Don’t change the points after you take a trade. If you do, it will just spoil your upcoming trade and all you’ll be doing is losing your trading plan. Over time, your whole plan and portfolio will unravel if you keep on this path.
Don’t ignore your emotions, it’s okay to be disappointed that you lose and feel successful when you win a trade.
You need to be aware of your feelings, you need to know when you’re not at your peak, and you should stay away from the screen, maybe not trade that day. Learn how to respond in any emotional way, insert it into your trading plan, so you’ll know next time how to act.
Here is a special webinar by Gil Ben Hur about the correct mindset for traders
The key to dealing with FOMO and so many other problems associated with trading is to be fully responsible for 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 that 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’ve zeroed in on your trading plan, you’re doing the right thing.
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