Last Updated on 29 June, 2022 by Samuelsson
FOMO is the acronym for the “fear of missing out”, which refers to the feeling of anxiety or uneasiness you get when other people are sharing in a positive or unique experience while you are missing out. The phenomenon has been magnified with the advent of social media which makes it easy for us to know what others are experiencing at every moment. But what does FOMO mean in trading?
In the financial trading world, FOMO refers to the fear that a trader or investor feels when missing out on a potentially lucrative investment or trading opportunity. A trader’s fear of missing out becomes greater the more the market continues to act in irrationally and rising significantly over a relatively short time.
This post will show you what you need to know about FOMO in trading, including the following:
- What FOMO means in trading
- The characteristics of a FOMO trader
- The factors that can trigger FOMO
- Why you should avoid FOMO in trading
- Tips for controlling your FOMO in trading
What is FOMO in trading?
In trading, FOMO is a situation where a trader is afraid of missing out on a huge trading opportunity in the market. FOMO is a common issue in financial trading and can affect anyone — both new traders with retail trading accounts and professional traders working for big institutions can experience fear of missing out.
That feeling of missing out on a trade occurs when you notice a sharp rally in a stock and feel like “I should be riding this move; I can’t let this opportunity pass me by.” In essence, the desire to join in on the price movement clouds your judgment, making it difficult for you to perform the necessary analysis of the stock before placing a trade.
Placing trades out of FOMO results from our natural tendency to believe that what is happening will continue into the recent future, which is a common cognitive bias. In the financial trading world, every moment in the market is unique and anything can happen at any time.
Trading out of FOMO shows that our overriding trading emotions greed and envy — we desire to gain the same profit those who are already in on the trade are gaining, without considering that the price movement may have run its course. Unfortunately, the FOMO feeling becomes greater the more the market continues to move in that direction. However, the farther the price moves, the more likely it will actually reverse or make a pullback. From experience, most trades placed out of FOMO often end up as losers, which could have been avoided with a little bit of discipline.
FOMO has become a very common phenomenon in today’s world where social media makes it easy to know what others are doing. In fact, there seems to be a form of herd mentality in FOMO, which, analysts believe, is driving the irrational market rallies in the post-pandemic era. Despite the effects of the Coronavirus pandemic, the U.S. stock market keeps churning out a string of record highs. It appears that social media is fueling mass FOMO, with investors on the sidelines jumping into the market in order not to miss out, thereby driving the markets further up.
At the individual level, FOMO stems from the feeling that other traders making money while you are left out, so you too want to get a piece of the pie. However, it leads to a lack of long-term perspective, an unwillingness to wait, too much confidence or too little confidence, and overly high expectations. FOMO is basically about emotional trading, and if left unchecked, you may end up neglecting your trading plans and taking too much risk.
To overcome FOMO in trading, you need to conquer your trading emotions, such as greed, envy, jealousy, impatience, fear, excitement, and anxiety. These emotions keep you in the FOMO cycle, where you buy at the market top out of greed, envy, jealousy, and excitement and sell at the market bottom out of fear, anxiety, and impatience, only to be tempted to buy again when the market is surging to the top.
The characteristics of a FOMO trader?
The fear of missing out is a daily enemy for all traders as it influences our decision-making as traders on many levels, including jumping into trades too early without confirmation and chasing trades that have gone. It is only with good control of trading psychology can one master FOMO in trading. However, not all traders have mastered their trading psychology. Many still act on FOMO, and they usually share the following characteristics:
- Greed: A FOMO trader wants it all and wants it NOW. If this is how you feel when you trade, then FOMO is probably also a problem for you. Thinking how much to make from a trade rather than focusing on executing your trades properly.
- Herd mentality: A FOMO trader often likes to do things because others are doing it and not that s/he understands why those ones are doing it. In trading, following the crowd may lead to irresponsible trading and disastrous outcomes.
- Impatience: FOMO traders are often impatient. They don’t want to wait for the setup; they just want to get into a trade because they are afraid that the price might run away.
- High expectations: Some traders just have very high expectations. They want to double their accounts in months, so they trade irrationally.
- Lack of confidence: For some traders, after a few losing trades, they try to play catch up. They enter random trades just to make quick profits and recover their losses. Unfortunately, they set themselves up for more losses.
- Indecision: Some traders are just bad at making decisions, but good decision-making is key to trading. A trader is constantly making one decision or the other — when to enter a trade, the position size, where to place the stop loss and profit target, etc. Those who cannot make decisions are prone to FOMO.
- No trading strategy: FOMO traders don’t often have a trading strategy. They just trade as they feel like. When the price is moving in one direction, they think that it would move forever in that direction.
- No long-term perspective: FOMO traders don’t often approach trading with a long-term outlook. If they do, they will know that there are thousands of new trades waiting for them and won’t place much importance on one trade alone.
- Predicting a winner: A FOMO trader tends to believe that s/he knows what will happen next in the market. There is this belief that since s/he is in a trade, the market will keep moving in that direction.
- Analysis paralysis: Some traders affected by FOMO actually see the trade setups early enough but get paralyzed in their analysis that they can pull the trigger then. When the price eventually starts surging in the expected direction, they try to chase the trade even though it has moved from the right entry level.
- No risk management plan: Those who trade out of fear of missing out don’t often plan how to manage risk in trading. Most times, when they enter the trade, the price is already extended that it becomes difficult to find the right place to place a stop loss order.
The factors that can trigger FOMO
While FOMO is a trading emotion a trader feels within, there is a range of factors that may trigger the feeling. Some of those factors include the following:
- Increased market volatility: A trader is more likely to develop FOMO when there is an increase in market volatility, with the price swinging in one direction or the other. On seeing a big price swing in one direction, the trader may be tempted to hop in and ride the move.
- News: Some news can make a trader want to hop in the market so as not to miss out on an assumed opportunity to make money.
- Getting a tip: A trader may get a tip that a particular stock is about to make a huge move, and out of fear of missing out, he immediately buys the stock without any further analysis.
- Social media financial forums: There are many social media forums where traders discuss their trades. You can see them on Twitter, Reddit, FaceBook, Instagram, and others. One may feel left out when it looks like everyone is in a particular winning trade.
- A long winning streak: On the individual level, a long winning streak can make you so excited. You may start feeling invincible and trading randomly. Probably the market is in a trend and almost any trade turns a winner. Eventually, when the market condition changes, the inevitable losses can get catastrophic.
- A losing streak: A losing streak can make you scared of placing trades when your trade setup appears. Later on, when you see that the price is moving in the expected direction, you may be tempted to chase the trade for fear of missing out on your only good prediction in recent times. Moreover, you may be eager to regain what you have lost and end up putting yourself in a situation that could lead to a catastrophic loss.
Why you should avoid FOMO in trading
From our discussions so far, you could see that FOMO is your real enemy as a trader. You must conquer it if you are to succeed as a trader. Of course, there are many reasons why you should avoid FOMO in trading, but we will only focus on these:
- Difficulty in setting a stop loss order: When you place a trade out of FOMO, the price has likely moved from the ideal entry level by the time you entered the trade. Ordinarily, your stop loss should be some pips beyond a strong support or resistance level. But when you chase a trade that has moved, setting your stop loss at the right level would mean risking more than you usually do or reducing your position size. Placing a smaller stop loss order might get your trade knocked out before the price even moves.
- Potential devastating losses: Trades placed out of FOMO are likely to fail because the price is already extended and may be ready for a retracement or full reversal by the time you are entering the trade. Moreover, most victims of FOMO are emotional traders who don’t even use stop loss orders, so they are at risk of catastrophic losses.
- Poor trading habit: Even if you are lucky and the FOMO trade urns a winner, it is still a wrong choice because that win will positively reinforce your poor trading habits and recklessness — the doomsday is only delayed!
Tips for controlling your FOMO in trading
Controlling your FOMO is an ongoing process; you may probably battle with it all through your trading career. While there is no simple solution to the impact of emotions in trading, these few tips that can help you to keep FOMO under control while trading:
- Use the capital you can afford to lose: It is essential not to trade with an amount you cannot afford to lose as that would raise your trading emotions, including FOMO, whenever you are in the market.
- The market will always be there: The market is always there, and trading opportunities will always arise, so there is no point in making one trade seem like the end of the world.
- Understand the market you are trading: Make efforts to understand the market you are trading. Conduct your own analysis — both fundamental and technical analysis.
- Have a trading strategy and plan: You must have a trading strategy or even strategies and also create a plan for your trades — including the position sizing, risk management, and trade management plans. Ensure you stick to your plan!
- Verbalize your reasons for entering a trade: Most times, we make excuses for why we are ignoring our analysis and plan to simply follow the herd. One thing that can help you to stick to your trading strategy and plan is to verbalize your criteria for taking the trade. This forces you to be aware of the reasons for the trade — is it based on your analysis and strategy or just emotions?
- Keep a trading journal: You must have a trading journal where you record everything about your trades for future reference and reviews.