Psychology Of A Trader: How To Deal With FOMO?
Have you ever caught yourself in a situation where you feel anxiety over the fear of missing out on a specific trading opportunity? If yes, you should learn how to cope with this. If not, you’d better explore this issue now because forewarned is forearmed. This article maps out the core of FOMO syndrome in trading, how it interferes with your trading career, and advice on how to overcome it.
What is FOMO in trading?
FOMO is an acronym for the “Fear of Missing Out,” a widespread psychological issue among traders. FOMO happens when a trader feels unease over the fear of losing a potentially profitable trade.
We are all well aware that the decision-making process is a bumpy road, especially in trading. Sometimes, traders obsessed with high returns become emotionally unstable and make mistakes out of greed or a sense of failure. So these unreasonable decisions ruin traders’ potential success.
FOMO behavior in trading
Oftentimes, the phenomenon of FOMO takes place when traders compare themselves to those successful professionals with high achievements and untold wealth. An everyday trader yields to despair and follows the market trends without comprehensive analysis and a clear mindset to reach for the perfect image of a trader.
For example, FOMO appears when a bullish trend grows. Your trading is affected by the market sentiment, news, and the growing excitement to enter or exit the market over the steady price growth. So, FOMO clouds traders’ minds and forces them to make decisions based on fear due to lost profits. Let’s say you open a trade at the peak of the growth. Then, the market is pulling back, and you still don’t close a trade because of FOMO, thinking it’s not the end. However, the long-lasting downward trend occurs, and you realize your failure.
In trading, FOMO is a tendency to make a trade under the pressure of herd instinct, social media influence, or a sense of jealousy, forgetting about strategy. Millions of traders still regret not purchasing bitcoins when they cost a paltry sum. The same about Tesla shares when the company hit the market in 2010 with an initial public offering of $17 per share. Traders believe they missed a great chance to become wealthy and successful by raising the price of these assets, while others managed to earn millions and billions of dollars. As a result, they have FOMO for next similar chances. Posts on social media from the allegedly successful traders only fuel FOMO.
Another example of FOMO behavior is to re-enter the market, moving in the same direction after profit taking. These traders suppose that by making a profit on half of the market trend, they lose to more forward-thinking traders. So, they seek to immediately correct the situation by re-opening the positions.
FOMO drives traders to act impulsively by feeling regret, greed, and jealousy. That’s why their guiding star is many unworthy factors but not a comprehensive market analysis with a well-planned trading strategy. Major market makers never miss the opportunity to manipulate the traders with FOMO by provoking them to make unreasonable decisions. Most of those who follow the crowd eventually lose. By the way, about 56% of traders suffer from FOMO.
The features of a FOMO trader
Here we’ve prepared a list of characteristics of a FOMO trader:
- guided by the herd instinct;
- demonstrates impatience;
- focuses on untold wealth;
- feels a lack of confidence;
- operates without a comprehensive trading strategy and risk management plan.
The factors that can cause FOMO
Since FOMO is a psychological condition, various triggers can cause it in traders' minds. Let's discuss some of these triggers.
- Social media and telegram channels. Social media such as Facebook, Instagram, and Reddit have different trading communities providing trading and business information, including advice, tips, advertisement, and calls for specific trading activities as well as trading telegram channels containing the same types of information. These resources may create an image of the triumphant crowd following their recommendations, raising anxiety among everyday traders about being left out when it looks like everyone is making a packet.
- News. The significance of news in trading is doubtless. News always generates certain feelings. Some news causes panic and anxiety, provoking traders to make rapid and unreasonable decisions. So, a trader may enter the market to avoid missing out on the possible profit due to FOMO arising from some news.
- Market volatility. FOMO is more likely to surface at a time of high market volatility. When a trader witnesses sharp price fluctuations upwards or downwards, there is a big desire to hop into the market without a comprehensive analysis.
- Winning streak. When you make many successful trades being on a roll, you become unstoppable and excited about further winnings. However, your pursuit of winning and fear of missing out on the subsequent profit may cloud your mind and make you perform beyond your trading plan, causing a catastrophe.
- Losing streak. If a trader faces many losing trades in a row, he will probably become nervous and upset, wishing to compensate for losses. This deplorable situation gives rise to a fear of missing out on any good profit while the price moves in a favorable direction. So a trader enters the market leading by emotions rather than logic and critical thinking.
Why FOMO is fatal for traders
As we have already mentioned, FOMO is quite destructive for traders. It’s a high barrier to your improvement as a trader, blocking the sound mind and rationality in trading. All traders should do their best to avoid FOMO. These are some reasons why:
- Inevitable losses. In trading, this is vital to stay cold-headed and objective, while FOMO leads to excessive emotionality and, let’s say, unconsciousness. Only by sticking to a developed trading plan performing a comprehensive market analysis, and establishing a full-fledged risk management plan can you become a pro trader. Otherwise, cases of making profits without mentioned trading tools are occasional and significant losses are only a matter of time.
- Violation of discipline. Everyone knows that discipline is crucial in trading. It keeps your trading career afloat and helps avoid failures and professional burnout. FOMO behavior ruins your trading discipline, leading to aggravated risks, leaving trading plans, emotional instability, and, eventually, significant losses.
- Problems with placing a stop-loss order. There is a high probability that due to the fear of missing out on a profitable trade, you hop into the market when the rally has already begun and the price is in the middle range. FOMO makes you open a trade late and exposes you to a risk of more drawdowns.
- Drawdown. So, you may suffer significant drawdown retracements, and your required reward rate will be low as you have to place a wide stop loss position to survive.
- Bad trading habits. Making a profit from some trades under the fear of losing a potentially profitable trade doesn’t mean you should always trade this way. Ultimately, the winning streak ends, and you will suffer devastating losses.
How to Handle FOMO
FOMO is your enemy, and you must know how to suppress it on your way to high trading achievements. Here we’ve prepared a list of tips on how to prevent the fear of missing out:
- Accept the problem.
Do not try to avoid your fear of missing out on some trading opportunities with the following emotional breakdowns. Accepting your psychological problem is the first step to healing and successful trading.
- Develop your trading discipline.
It’s vital to plan your trading routine. It would help if you established your working and resting time, where working time is also planned in detail. This self-management makes traders confident and stable in their performance, excluding panic trading and unreasonable actions.
- Set your trading goals.
Aimless trading will always fail. In this case, you will be guided by fleeting desires that give rise to FOMO behavior.
- Stick to your trading plan and strategy.
The first rule of a successful trader – create a full-fledged trading plan with entry and exit conditions, rules for your position size, and a risk management plan in place.
- Work with your mentality.
Never forget about your mental health. A trader should always get enough sleep and physical activity to stay hard-working and unbiased. We’ve prepared for you a paper about meditation as one of the sources to recover your emotional energy.
- Expand your trading horizons.
Never stop improving yourself as a trader.Learn new things every day. We recommend you learn all about different types of trading analysis, such as fundamental, technical, and sentiment. Then, try to adapt your analysis to the shifting market conditions.
- Invest the funds you can afford to lose.
If the trade does not work in your favor, you should be satisfied with the amount of capital you will lose. The sound investment will eliminate emotional breakdowns and confusion.
- Have a trading journal.
Track your trading in the trading journal. This recording will help you learn what works and what doesn’t to grow as a trader and have higher returns. Logic and analysis allow you to avoid FOMO.
All in all, FOMO is a destructive behavior that causes inevitable significant losses and destroys your trading career at large. Dealing with FOMO is an essential skill in trading because, with a developed psychological side, it is possible to become a professional with stable returns. Our guides and recommendations will help you to overcome FOMO and grow as a trader. Join us and create your legendary trading path with FBS.