An emotion that can sometimes, always get the better of you in your trading.
 

The fear of missing out, also known as FOMO, is one amongst other emotions in trading that is put to 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 just a bit.

Adapted from Google Definition.

Let's insert the words 'the market' after “elsewhere” and swap “posts seen on a social media website” with 'market indicators and criticism from fellow traders'.

Now we will read 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.

Two Branches of FOMO

We briefly touched on this idea in The 5%ers' article that was talks about fears in trading. I would like to elaborate this to clarify a few misconceptions that new or inexperienced traders think when they approach trading.

Understanding FOMO is important because it’s the first step in the difficult journey of adjusting your mind to eliminate fear.

One of the reasons that it is difficult to rewire your brain to counter-attack FOMO is because fear works on two contrary emotions:

a. You notice that your trade has more potential, yet you don’t want to move away from it, or, b. You notice that your trade is retracing and eating your floating profit but you would like to protect your profit that's been made.

These feelings put the trader in a difficult situation. Should you have hope of a good break-even though it will be at the expense of losing? Even while, a trade is heading towards retracement or breaking even? Or can you hold on to your trade and squeeze more potential out of it?

This is the core of the conflict that creates FOMO in trading.

FOMO from Trading Outside the of Market

Another element of this fear is when you’re on the sidelines watching the action of the market. You're flat, you're not in the market but you see upcoming opportunities and may be compelled to hastily enter the market prematurely or enter late and miss an opportunity entirely.

Or we could say that you noticed your trade reaching a level that you would want to enter at, but not all conditions had been met for the entry. Even though, the missed trade showed that it would have been a slam dunk for you anyway.

Premature FOMO in Trading

Now the scenario repeats itself but you have enough 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, 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 Trading 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 notice the confirmations but the market has moved along. You jump in late and enter your trade after the rally had already begun.

In this example, FOMO on a good rally will make you jump on the trade quite late, and with that, it exposes 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. Your risk-reward ratio will be very low because you have to allow a wide stop loss position in order to survive.

FOMO Recap

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 entry to FOMO on exit - the anxiety can be paralyzing.

Resolving the fear of missing out is something that every trader ought to work on. Mental exercises to break the fear is crucial when it comes to self-control and restraint.

FOMO Resolutions for Traders

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 realistic entry and exit points into your plan and only take these. Don’t change the points after you take a trade as it will swap you for the upcoming trade and you will have to loosen your plan. If you remain on this type of path, eventually your whole plan and portfolio will unravel.

The key to dealing with FOMO and so other problems associated with trading is to be fully responsible for sticking to your plan and only taking what you expected to take. Stick to it and don’t allow retracement, fast momentum or any other event change your plan.

Never listen to chatter or any member of your trading community when they mention that you should have remained 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 plan, you’re doing the right thing.