How do you explain traders desperately buying at high prices as stock prices continue to rise? Or,those who buy Bitcoin at a very high price – even when they are unsure what cryptocurrency is?
The markets are fast-paced and require real-time reactions. This can become psychologically overwhelming, especially when the markets are experiencing exceptionally high volatility and it becomes tempting to follow the crowd, resulting in Fear of Missing Out (FOMO).
What is FOMO in trading?
FOMO iscommon among traders. It stems from feeling that other traders are more successful and creates an urgent need to succeed as well. FOMO can lead to a lack of long-term outlook, overly high and unrealistic expectations, too little confidence or overconfidence, and impatience.
For instance, the feeling of missing out can cause traders to close trades at inopportune moments or risk too much capital. It can even make traders enter trades with little thought.
What causes FOMO when trading?
FOMO is primarily caused by hindsight bias. In psychology, this phenomenon is used to describe "people's tendency to overestimate their ability to perceive events that have already occurred when the outcome could not possibly have been predicted.”
For example, a trader may think “I could have doubled my account today.” In hindsight, this is obvious, but there is no way of knowing this until after the trade has been made.
Emotions are also a key driver of FOMO. They can lead to trading which is characterised by excessive risk levels and neglecting a trading plan. Common emotions that feed into FOMO include impatience, greed, fear, anxiety, jealousy, and excitement.
External FOMO triggers
FOMO is psychological but it can be triggered by several external factors including:
Social media especially Twitter. Being inundated with trader success stories on social media can be toxic. It’s important to research influencers and social media posts to avoid being pressured into making poor decisions.
News and rumours. The world of trading is affected by news and rumours and this can heighten the fear of being left out.
Volatile markets. No trader wants to miss out on good opportunities and this can lead to hopping on a trend regardless of the direction of market movement.
Overcoming FOMO when trading
Dealing with FOMO hinges on discipline and good risk management. The following are some tips to help overcome the fear of missing out.
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Sticking to a trading plan. Know your strategy, create a plan based on this strategy and stick to it. A robust plancan helpyou react to market movementsin a controlled way.Italso improves trading confidence by curbing emotional trading.
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Knowledge of the markets is essential. Every trader should study and understand the markets and do their own analysis to make informed trades.
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Waiting for other trades. You need to realise that other opportunities will come along and it’s worth waiting for the right ones. Accept that trading has its ups and downs and not every trade will be a winner, even with a good strategy.
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Interact with other traders. Sharing experiences with other traders and understanding that they are in similar or relatable positions can make FOMO less intense and improve trading psychology. Trading forums and professional groups are a good place to start.
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Keeping a trading journal. A journal is widely used by successful traders and is one of the most effective tools for performance management. Keeping a journal helps with recording and reviewing trades for improved trading and future reference. It also helps with tracking progress and studying mistakes. Some important statistics to record in the journal include:
Risk/reward ratio
Win percentage
Trading mistakes -
Embracing JOMO (Joy Of Missing Out). Trading professionally requires regularly disconnecting from the market to do some analysis, refining your trading plan, or just enjoying the day. This will make you less anxious about missing out on trades.
FOMO contributes to psychological trauma in the markets and embracing JOMOcan lessen or eliminate this stress. This will go a long way in improving your trading performance.
Has FOMO affected your trading? How have you dealt with it? Join the discussion, share your thoughts, and help someone who may be suffering from FOMO when trading.
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Editors’ Picks
EUR/USD flirts with daily highs, retargets 1.1900
EUR/USD regains upside traction, returning to the 1.1880 zone and refocusing its attention to the key 1.1900 barrier. The pair’s slight gains comes against the backdrop of a humble decline in the US Dollar as investors continue to assess the latest US CPI readings and the potential Fed’s rate path.
GBP/USD remains well bid around 1.3650
GBP/USD maintains its upside momentum in place, hovering around daily highs near 1.3650 and setting aside part of the recent three-day drop. Cable’s improved sentiment comes on the back of the Greenback’s irresolute price action, while recent hawkish comments from the BoE’s Pill also collaborate with the uptick.
USD/JPY edges up above 153.50 with all eyes on US CPI figures
USD/JPY appreciates above 153.00 but remains on track for a 2.4% weekly loss. Trading volumes remain subdued on Friday, ahead of the IS CPI release. The Yen remains supported by hopes of a stable government and calls for further BoJ tightening.
Editors’ Picks
EUR/USD: Yes, the US economy is resilient – No, that won’t save the US Dollar Premium
Some impressive US data should have resulted in a much stronger USD. Well, it didn’t happen. The EUR/USD pair closed a third consecutive week little changed, a handful of pips above the 1.1800 mark.
Gold: Metals remain vulnerable to broad market mood Premium
Gold (XAU/USD) started the week on a bullish note and climbed above $5,000 before declining sharply and erasing its weekly gains on Thursday, only to recover heading into the weekend.
GBP/USD: Pound Sterling remains below 1.3700 ahead of UK inflation test Premium
The Pound Sterling (GBP) failed to resist at higher levels against the US Dollar (USD), but buyers held their ground amid a US data-busy blockbuster week.
Bitcoin: BTC bears aren’t done yet
Bitcoin (BTC) price slips below $67,000 at the time of writing on Friday, remaining under pressure and extending losses of nearly 5% so far this week.
US Dollar: Big in Japan Premium
The US Dollar (USD) resumed its yearly downtrend this week, slipping back to two-week troughs just to bounce back a tad in the second half of the week.
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