What does FOMO mean in trading?
You’ve probably heard of the acronym FOMO for “Fear Of Missing Out.” Chances are you’ve felt it too. It happens when you miss out on an event, a work trip, or even just a cup of coffee with a friend. And it’s not a fun feeling.
FOMO shows up a lot on social media where we see pictures of people who appear to be living their “best life.” But, this acronym has also found its way into the financial market, resulting in impulse trades and frantic investing.
Before we dig into what FOMO is in trading, we’ll give a brief overview of where the fear of missing out stems from.
FOMO in human psychology
This concept refers to the anxious feeling you get from seeing other people have positive experiences while you’re missing out. It’s a phenomenon that’s prevalent on social platforms. An example is Instagram, which emphasizes only the rewarding parts of people’s lives.
The ‘fear of missing out’ feeling is ingrained in our wiring. For this reason, it doesn’t only show up under social circumstances. It’s crept into our financial markets and doesn’t seem to be leaving any time soon. So, let’s take a look at how this concept manifests in trading psychology.
FOMO in trading psychology
In the context of trading, the fear of missing out addresses the anxiety a trader feels by missing out on a potential, lucrative investment. This anxious emotion causes overreactions to any information that could indicate a profitable opportunity. And so, FOMO trading results.
What is FOMO in trading?
FOMO in trading occurs when trades are placed out of fear rather than logic. These trades are common with FOMO stocks, which are stocks that are valued higher than they should be because of FOMO.
In the world of trading, logic, and reasoning often have the upper hand. This explains that while FOMO has made some people good money, it has often resulted in losing trades. Thus, it’s critical to understand how this emotion is triggered.
FOMO trading triggers
We know that FOMO is caused by the anxiety that other people are making lucrative trades while you’re not.
But, the more important concept to understand is why we get triggered by FOMO in the first place. Why is it so important to us to make sure we’re doing what everyone else is doing? Let’s explore this further.
Because FOMO in trading results from an irrational emotional reaction, it has more to do with our psyche than the financial market.
A FOMO trader with unbridled greed is likely to bid on stocks at a much higher value than what they should be worth. Thinking about how much you’d make from a trade instead of focusing on proper trading techniques results from greed and envy.
Reeling from a significant loss can lower a trader's confidence. Thus, it can cause them to enter random trades just to make fast profits or recover from recent losses. This is a dangerous cycle that often results in more losses.
Following the crowd can lead to irresponsible trading and catastrophic outcomes. FOMO in trading may cause traders to do what others are doing, even when it doesn’t fit with their trading strategy.
Good decision-making is key in trading. But, it takes patience to develop strong decision habits and good judgment calls. So, impatient traders who are indecisive are likely to succumb to FOMO.
FOMO in trading can also be triggered by the general buzz circling the financial market. The two main sources that cause FOMO in the stock market are the news and social media platforms.
FOMO stock prices usually result from stocks that get airtime and are performing particularly well. While a stock that shines in the news can make investors want to buy in, its rally may have already run its course.
There are many social media forums where people talk about the financial market. In these forums, investors can give tips and live updates on trades. As a result, a trader who visits these platforms may feel like they’re missing out on potential opportunities. Thus, social media platforms can cause pressure to act on hot tips.
How FOMO can hurt your trading success
We’ve mentioned that FOMO in trading has resulted in big money for some people. But, more often than not, it’s a high-risk trading strategy that produces devastating losses.
So, let’s go over a couple of disadvantages of FOMO trading.
Potential for huge losses
Trades placed out of fear are likely to fail. This is due to the fact that the price is already extended and may be due for a reversal by the time one enters. Also, people who are victims of FOMO are emotional investors who may not use stop-loss orders. This can result in many, big losses.
Promotes bad habits
It can be more dangerous to be one of the few lucky ones whose FOMO trade turned out to be a winner. This is because it can result in irrational high confidence and recklessness. As a result, it reinforces poor trading discipline and delays doomsday.
How to rise above FOMO in trading
Because FOMO is deeply embedded in human wiring, it can be very tough to combat. But, adhering to the following tips can improve trading psychology over time.
Use what you can afford to lose
It’s vital to trade only with the capital you can afford to lose. This is because trading with an amount you can’t lose will heighten your emotional state. Thus, your trading emotions can result in a big case of FOMO.
Stick to your strategy
Your trading plan or strategy should include the following:
- Your trading philosophy
- Risk tolerance
- Position sizing
- Diversification strategies
- Any other broader financial goals
Having a plan in place with rules for what constitutes a good trade will help you beat trading FOMO. Just make sure you stick to your plan and only take trades that meet your criteria.
Keep track of your trades in a journal
A trading journal is a must whether you’re an expert or novice in the financial market. It’s an efficient way of tracking the entry and exits of your trades to use for future reference.
Keeping a journal will also help you identify patterns in your mistakes. This can prevent you from making them again in future trades. Therefore, a journal is an effective method for avoiding FOMO in trading.
Use trading tools
It can be difficult for traders to avoid FOMO in day trading, where critical timing plays on emotions. So, a tool like technical analysis can be a great help.
Technical analysis helps combat the fear of missing out because it shows market data which may confirm or invalidate a trade. It enables you to monitor trend detection and reversals. Thus, you’ll be able to incorporate more logic and less emotion in your decisions.
Control your FOMO
Emotion plays the lead role in any FOMO decision. The feeling of fear is such an integral part of our wiring, whose primary role is to promote survival. But, it can also turn into irrational anxiety that interferes with our daily lives.
Understanding the manifestation of FOMO in trading is vital to making better trades. By recognizing your triggers and conducting proper analysis, you can cut your potential losses.